Accounting Records and Systems(MBA 206)

Maria Arlene (Bam) T. DisimulacionConsultant for Marketing, Communications

and M.I.C.E. Tourism Email: bamd888@gmail.com; bamd888@yahoo.com

ACCOUNTING PROCESS

Each account in the chart of accounts is typically assigned a name and a unique number by which it can be identified.

Assets10200 Cash 10600 Petty Cash Fund12100 Accounts Receivable17300 Equipment17800 Vehicles18100 Accumulated Depreciation - Buildings

Liabilities20200   Notes Payable 22100   Wages Payable23100   Interest Payable24500   Unearned Revenues25600   Bonds Payable

SAMPLE ACCOUNTS

Typically listed in this order:

Balance Sheet Accounts Assets Liabilities Owner's (Stockholders') Equity Income Statement Accounts Operating Revenues Operating Expenses Non-operating Revenues and Gains Non-operating Expenses and Losses

CHART OF ACCOUNTS

Each account in the chart of accounts is typically assigned a name and a unique number by which it can be identified.

Stockholders' Equity 27100 Common Stock, No Par27500 Retained Earnings29500 Treasury Stock

Operating Revenues31010   Sales - Division #1, Product Line 010

Expenses50100   Marketing Dept. Salaries59200   Payroll Dept. Supplies

SAMPLE ACCOUNTS

SOURCE DOCUMENTS

Source documents are documents, such as cash slips, invoices, etc. that form the source of (and serve as proof for) a transaction.

Invoices, cash slips, receipts, check counterfoils, bank deposit slips and even internet payment confirmations are all source documents.

JOURNALS

These are chronological (date-order) records of transactions entered into by a business.

Journals are that first basic entry of debit and credit for each transaction.

Sample General Journal

LEDGER (T-ACCOUNTS)

The ledger is a collective term for the accounts of a business.

The accounts are in the shape of a ‘T’ and thus are often referred to as ‘T-accounts.’

Account Name

DEBIT CREDIT

$ XXX $ XXX

GENERAL RULES: DOUBLE-ENTRY ACCOUNTING

1. Assets are always: increased () by debits and decreased () by credits

2. Liability and Owner’s Equity accounts are always: increased () credits and decreased () by debits

3. Owner’s Equity for a corporation includes: Capital Stock and the Retained Earnings accounts

4. Revenues, expenses and dividends relate to Owner’s Equity through the Retained Earnings account

GENERAL RULES: DOUBLE-ENTRY ACCOUNTING

5. Expenses and dividends are increased () by debits and decreased () by credits

6. Revenues are increased () credits and decreased () by debits

7. The difference between Total Revenues and Total Expenses for a period is Net Income or Net Loss which increases () or decreases () Owner’s Equity

DEBIT-CREDIT RELATIONSHIPS of ACCOUNTS

Capital Stock

DR CR

Retained Earnings

DR CR(–) (+) (–) (+)

Owner’s Equity

DR CR(–) (+)

Assets

DR CR

Liabilities

DR CR(+) (–) (–) (+)

+=

Expenses

DR CR

Revenues

DR CR(+) (–) (–) (+)

Dividends

DR CR(+) (–)

A sheet displaying all the accounts of a business, drawn up as a trial (test) of whether the total of all the debit balances equal the total of all the credit balances

The trial balance is prepared as a final check just before the financial statements are drawn up.

TRIAL BALANCE

Sample Trial Balance

ACCOUNTING PROCESS

ADJUSTING ENTRIES

Adjusting entries are accounting journal entries that convert a company's accounting records to the accrual basis of accounting.

An adjusting journal entry is typically made just prior to issuing a company's financial statements.

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ADJUSTING ENTRIES

There are two scenarios where adjusting journal entries are needed before the financial statements are issued:

Scenario #1

Nothing has been entered in the accounting records for certain expenses or revenues, but those expenses and/or revenues did occur and must be included in the current period's income statement and balance sheet.

ADJUSTING ENTRIES

There are two scenarios where adjusting journal entries are needed before the financial statements are issued:

Scenario #2

Something has already been entered in the accounting records, but the amount needs to be divided up between two or more accounting periods.

ADJUSTING ENTRIES

FINANCIAL STATEMENTS

Financial statements are the most important reports of a business. These statements are prepared from the information in the trial balance.

The purpose of these statements is to show the user the financial position, financial performance and cash flows of a business, as well as other useful information concerning the business.

BALANCE SHEET

The balance sheet presents a company's financial position at the end of a specified date.

Some describe the balance sheet as a "snapshot" of the company's financial position at a point (a moment or an instant) in time.

BALANCE SHEET

INCOME STATEMENT

The income statement is important because it shows the profitability of a company during the time interval specified in its heading.

The period of time that the statement covers is chosen by the business and will vary.

INCOME STATEMENT

CLOSING ACCOUNTS

These journal entries are made after the financial statements have been prepared at the end of the accounting year.

Most of the closing entries involve the income statement accounts (revenues, expenses, gains, losses, and summary/clearing accounts) whose balances will be transferred to the owner's capital account or the corporation's retained earnings account.

CLOSING ACCOUNTS

Two-fold purpose:

1. Closing is a mechanism to update the retained earnings account in the ledger to equal the end-of-period balance.

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CLOSING ACCOUNTS

Two-fold purpose:

2. Revenue, expense, and dividend accounts represent amounts for a period of time; one must "zero out" these accounts at the end of each period (as a result, revenue, expense, and dividend accounts are called temporary or nominal accounts). In essence, by zeroing out these accounts, one has reset them to begin the next accounting period.

In contrast, asset, liability, and equity accounts are called real accounts, as their balances are carried forward from period to period. For example, one does not "start over" each period accumulating assets like cash and so on -- their balances carry forward.

FOUR-STEP PROCESS OFCLOSING ACCOUNTS

1. Close revenue accounts (to a unique account called Income Summary -- a non-financial statement account used only to facilitate the closing process)

2. Close expense accounts to Income Summary

3. Close the Income Summary account to Retained Earnings

4. Close the Dividend account to Retained Earnings

CLOSING ACCOUNTS

FOUR-STEP PROCESS OFCLOSING ACCOUNTS

By doing this, all revenues and expenses are "corralled" in Income Summary (the net of which represents the income or loss for the period).

In turn, the income or loss is then swept to Retained Earnings along with the dividends. Recall that beginning retained earnings, plus income, less dividends, equals ending retained earnings; likewise, the closing process updates the beginning retained earnings to move forward to the end-of-period balance.

ACCOUNTING PROCESS

THANK YOU

Maria Arlene (Bam) T. Disimulacion