complete steps 1-3 in accounting cycle © dale r. geiger 20111

© Dale R. Geiger 2011 1

Complete Steps 1-3 in Accounting Cycle

Principles of Cost Analysis and Management


What is the Accounting Cycle?

The Accounting Cycle is the systematic process by which accounting information is recorded, compiled, and reported to users.


Terminal Learning Objective

• Task: Complete Steps 1-3 In Accounting Cycle (Journalize, Post, Trial Balance)

• Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors.

• Standard with at least 80% accuracy:• List steps in the Accounting Cycle• Describe terminology (journal, ledger, debit, credit)• Record transactions in tabular format under the accrual basis


The Accounting CycleRecord

TransactionsPost to Ledger

Prepare Trial

Balance

Adjust AccountsAdjusted

Trial Balance

Prepare Statements

Close Accounts

Post-Closing Trial Balance




Prepare Trial

Balance


Trial Balance

Prepare Statements

Close Accounts



Check on Learning

• What is the first step in the Accounting Cycle?• What is the purpose of the Trial Balance?


The Journal• Accounting events are recorded in the JOURNAL

• The Journal is a chronological record of all transactions

• Each transaction requires a journal entry• Each journal entry consists of at least one Debit and

one Credit: “Double Entry” Accounting• Debit amounts must equal Credit amounts• Debit: an entry on the left-hand side of the account• Credit: an entry on the right-hand side of the

account


Regarding Debits and Credits

• Debits and credits are neutral• Debit ≠ decrease • Credit ≠ increase• It depends on the type of account

• Some accounts types record increases with a debit, some record increases with a credit.

• The side of the account which records an increase is the account’s NORMAL BALANCE.


“Normal” Account Balances

Assets = Liab + FinPosition ± Net Change Net Change = Revenue – Expense, so:

Assets = Liab + FinPosition + Rev – Expense + Expense = + Expense

(Add Expense to both sides)Assets + Expense = Liab + FinPosition + Rev

Everything on the LEFT side of the equation increases with an entry to the LEFT side of the

account







account





Everything on the RIGHT side of the equation increases with an entry to the RIGHT side of

the account



Assets + Expense = Liab + FinPosition+ Rev

debit credit

+ – + – – + – + – +


Check on Learning

• What does “credit” mean?• An increase to an expense is reflected with an

entry on which side of the account?


Anatomy of a Journal Entry

Page 1

DATE ACCOUNT TITLES P.R. DEBIT CREDIT

1-Dec Merchandise Inventory 2500 Accounts Payable 2500Purchased inventory on account

GENERAL JOURNAL

Date of Transaction



Page 1



GENERAL JOURNAL

Account Debited



Page 1



GENERAL JOURNAL

Amount Debited



Page 1



GENERAL JOURNAL

Account Credited



Page 1



GENERAL JOURNAL

Amount Credited



Page 1



GENERAL JOURNAL

Explanation of Transaction



Page 1



GENERAL JOURNAL

PostingReference(Leave Blank)



Page 1



GENERAL JOURNAL

Becoming fluent in Debits and Credits takes practice beyond the scope of this course. We will demonstrate a few journal entries to give you the flavor, and then proceed to Step 2.


Lacy’s Journal

Page 1


1-Jan Cash 200 Financial Position 200Received equity transfer from family

GENERAL JOURNAL

Transaction Description Cash + Other

Assets = Liab + Financial Position + Rev – Exp

Receives $200 Equity Transfer +200 + = + +200 + –

Debit to Cash (left side) reflects an increase in the cash account.

31

Lacy’s Journal

Page 1



GENERAL JOURNAL



Receives $200 Equity Transfer +200 + = + +200 + –

Credit to Financial Position (right side) reflects an increase in the financial

position account.© Dale R. Geiger 2011

32

Lacy’s JournalPage 2


5-Jan Other Assets 65 Cash 65Purchased Supplies

GENERAL JOURNAL



Purchased Supplies -65 + +65 = + + –

Debit to Other Assets (left side) reflects an increase in the Other

Assets account.© Dale R. Geiger 2011


Lacy’s JournalPage 2


5-Jan Other Assets 65 Cash 65Purchased Supplies

GENERAL JOURNAL



Purchased Supplies -65 + +65 = + + –

Credit to Cash reflects a decrease in the Cash account.


The Ledger• The LEDGER is a Summary of all Transactions By

Account• We will represent each Ledger Account with a

T-Account• A debit entry from the Journal is posted on the left side of

the T-Account• A credit entry from the Journal is posted on the right side

of the T-Account• The balance of an account is its excess of debits over

credits (or vice versa)


Lacy’s LedgerCash Other Assets Liabilities

Financial Position Revenues Expenses

(+) (-) (+) (-) (-) (+)

(+) (-)(-) (+)(-) (+)




(+)200

(-) (+)20652040

--------------140

(-)5

---------------

(-)40

----------------

(+)40

---------------

(+) (-)(-) (+)(-) (+)

Page 1



GENERAL JOURNAL




(+)200

(-) (+)20652040

--------------140

(-)5

---------------

(-)40

----------------

(+)40

---------------

(+) (-)(-) (+)(-) (+)200

Page 1



GENERAL JOURNAL

38



(+)200

155

50

--------------130

(-)2010

56540

----------------

(+)20652040

--------------140

(-)5

---------------

(-)40

----------------

(+)40

---------------

(+)10

5---------------

15

(-)(-) (+)152050

---------------85

(-) (+)200

Transaction Description Cash + Other Assets = Liabilities + Financial Position + Revenues – Expenses

Ending Balance 130 + 140 = 0 + 200 + 85 - 15

After all transactions are posted, the Ledger Balances agree with our equation

© Dale R. Geiger 2011


The Trial Balance

• Lists all accounts and their balances in two-column format

• Proves that Debits equal Credits• Forces accountant to find errors before preparing

statements

• Provides a starting point for adjustments, statements and closing entries

40

Lacy‘s Trial BalanceAccount Title dr. cr.

Cash $130

Other Assets 140

Liabilities $ ---

Financial Position 200

Revenues 85

Expenses 15

Totals $285 $285

Our equation essentially show the same information as the Trial Balance:

Transaction Description Cash + Other Assets = Liabilities + Financial Position + Revenues – Expenses

Ending Balance 130 + 140 = 0 + 200 + 85 - 15© Dale R. Geiger 2011


Check on Learning

• A decrease to Cash is recorded on which side of the Cash account?

• The summary of transactions by account is called the…?


Conclusion

• Debits and credits are used in accounting systems to reflect changes in accounts

• It’s not necessary to memorize debits and credits to understand the effects of transactions

• We will rely on the equation and T-Accounts to illustrate transactions


Practical Exercise


Accounting Cycle Spreadsheet

Journal entries may be entered

by hand (this step is

optional)


Accounting Cycle Spreadsheet

The Trial Balance is generated automatically

from the T-Accounts.Note that

debits = credits


Practical Exercise

complete steps 1-3 in accounting cycle © dale r. geiger 20111

Documents

trial balance condition

accounting cycle dale

accounts normal balance

accounting cycle post

statements close accounts

account dale

credit record transactions

journal accounting events