Lecture

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Accounting Cycle (I) - Recording R di Economic E i Activities

Steps in accounting cycle and basic concepts of accounting records

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S Sequence of f Accounting A ti Cycle C l

1. Analyze transactions 2. Record the effects of transactions 3. Summarize the effects of transactions
Posting journal entries Preparing a trial balance Adjusting entries Preparing financial statements Cl i th Closing the b books k
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4. Prepare financial reports (Lecture 3)

Basic Concepts
Account and Ledger
Accounts are individual records showing increases and decreases. The entire group of accounts is kept together in an accounting record called a ledger.
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Cash Accounts Payable Capital C it l Stock

Basic Concepts
The use of accounts
Increases are recorded on one side of the T-account, and decreases are recorded on the other side. Title of the Account
Debit Credit

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Basic Concepts
Debits and credit
Ca sh 8,000 5/2 75 5/8 750 5/28 5/31 4,125

Receipts are on the debit side.

5/1 5/25 5/29 5/31 / Ba l.

2,500 2,000 150 50

Payments are on the credit side.

The balance is the difference between the debit and credit entries in the account.
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Basic Concepts
Debits and credits affect accounts as follows:

A = L + OE
ASSETS Debit for Credit for Increase Decrease LIABILITIES Debit for Credit for Decrease Increase EQUITIES Debit for Credit for Decrease Increase
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Basic Concepts
Double entry system
Each transaction is recorded with at least one debit and one credit For every transaction, total debits must be equal to total credits Total debits must be equal to total credits of f all accounts (must ( be balanced)

A = L + OE
Debit balances
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Credit balances
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Step 1 Analyzing Transactions

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Step 1 Analyzing Transactions

Is this transaction related to the company?
Entity principle: only record economic activities to a specific business entity

How does this transaction affect the financial positions of the company
Use debit and credit and the equality

Assets = Liabilities + Owners Equity q y

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Example 1: May 1: Jack and his family invested $8,000 in NUS Lawn Care Service and received 800 shares of stock.

Will Cash increase or decrease?

Will Capital Stock increase or decrease?

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Example 1: May 1: Jack and his family invested $8,000 in NUS Lawn Care Service and received 800 shares of stock.

Cash increases $8,000 with a debit.

Cash 5/1 8,000
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Capital Stock increases $8,000 with a credit. credit

Capital Stock 5/1 8,000

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Example 2: May 2: NUS purchased a lawn mower for $2,500 in cash.

Will Cash increase or decrease?

Will Equipment increase or decrease?

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Example 2: May 2: NUS purchased a lawn mower for $2,500 in cash.

Cash decreases $2,500 with a credit.

Cash 5/1 8,000 5/2 2,500

Equipment increases $2,500 with a debit. debit

5/2

Equipment 2,500
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Step 2 Record the Effects of Transactions

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Step 2 Record the Effects of Transactions

Journal: Similar to a financial diary, a chronological listing of all business transactions throughout the year Journal entry: A recording of a transaction where h d debits bit equal lt to credits dit

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GENERAL JOURNAL (pp.12)

Date 2010 May 1 Cash Capital Stock Owners invest cash in the business. 8,000 8,000 Account Titles and Explanation Debit Credit

GENERAL JOURNAL (pp.14)

Date 2010 May 2 Equipment Cash Purchased lawn mower.
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Account Titles and Explanation

Debit 2,500

Credit

2,500

Debits and Credits for Revenue and Expense (pp 7) (pp.7) Expenses decrease owners equity.
EQUITIES Debit for Credit for Decrease Increase

Revenues increase owners equity.

EXPENSES Debit for Credit for Increase Decrease

REVENUES Debit for Credit for Decrease Increase

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Investments by and Payments to Owners (pp 7) (pp.7) Payments to owners decrease owners equity equity.
EQUITIES Debit for Credit for Decrease Increase

Owners investments increase owners equity. equity

DIVIDENDS Debit for Credit for Increase Decrease

CAPITAL STOCK Debit for Credit for Decrease Increase

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Step 3 Summarize the effects of transactions

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Step 3 Summarize the effects of transactions

Posting (copying) journal entries to accounts in ledgers Preparing a trial balance

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Step 3 Summarize the effects of transactions

GENERAL JOURNAL
Date 2010 May 1 Cash Capital Stock Owners invest cash in the business. General Ledger 8,000 8,000 Account Titles and Explanation Debit Credit

Date 2010 M May 1

Cash Debit Credit 8 000 8,000

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Balance 8 000 8,000

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Step 3 Summarize the effects of transactions

GENERAL JOURNAL
Date 2010 May 1 Cash Capital Stock Owners invest cash in the business. General Ledger 8,000 8,000 Account Titles and Explanation Debit Credit

Date 2010 May 1

Capital p Stock Debit Credit 8,000

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Balance 8,000
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St 3 S Step Summarize i th the effects ff t of ft transactions ti

Leger acco account nt after posting
General Ledger Cash Debit Credit 8,000 2,500

Date 2010 May 1 2

Balance 8,000 5,500

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St 3 S Step Summarize i th the effects ff t of ft transactions ti

General Ledger Cash Debit Credit 8,000 2 500 2,500

Date 2010 May 1 2

Balance 8,000 5 500 5,500

T accounts are simplified versions of the ledger account that only show the debit and credit columns.
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Step 3 Summarize the effects of transactions

Posting (copying) journal entries to accounts in ledgers Preparing a trial balance

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NUS Lawn Care Service Unadjusted Trial Balance May 31, 2010 Cash $ 3,925 Accounts receivable 75 T l & equipment Tools i t 2 650 2,650 Truck 15,000 Notes payable $ 13,000 Accounts payable 150 Capital stock 8,000 Di id d Dividends 200 Sales revenue 750 p 50 Gasoline expense Total $ 21,900 $ 21,900
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All balances are taken from the ledger accounts on May 31 after considering all of NUSs transactions for the month.

Proves equality of debits and credits.

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The Accounting Cycle

Journalize transactions.

Post entries to the ledger accounts accounts.

Prepare trial balance.

Make end end-ofof year adjustments.

Prepare after-closing trial balance.

Journalize and Prepare financial statements. post closing by Vincent Chen entries.

Prepare adjusted trial balance. 28

Summary
The sequence of accounting cycle Th The use of fd debit/credit bit/ dit and d double d bl entry t system to record economic transactions Posting journal entries to ledgers Use ledgers to prepare a trial balance
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