5 - 1 © 2005 Accounting 1/e, Terrell/Terrell Recording Accounting Data Chapter 5.
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5 - 5 - 11© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
RecordingRecording
Accounting DataAccounting Data
Chapter 5Chapter 5
5 - 5 - 22© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 1Learning Objective 1
Identify and describe the Identify and describe the
eighteight
steps of the accounting steps of the accounting
cycle.cycle.
5 - 5 - 33© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
5 - 5 - 44© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
The Accounting CycleThe Accounting Cycle
Analyzing transactionsAnalyzing transactions
Journalizing transactionsJournalizing transactions
Posting transactions toPosting transactions tothe general ledgerthe general ledger
Preparing the trial balancePreparing the trial balance
5 - 5 - 55© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
The Accounting CycleThe Accounting Cycle
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
5 - 5 - 66© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 77© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
5 - 5 - 88© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Step 2:Step 2:Journalizing TransactionsJournalizing Transactions
TransactionTransaction
General journalGeneral journal
AccountAccount AccountAccount
??
Special journalSpecial journal
AccountAccount AccountAccount
??
5 - 5 - 99© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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..
5 - 5 - 1010© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Step 3:Step 3:Posting to the General Posting to the General
LedgerLedger
General JournalGeneral Journal
Account 101Account 101
Account 120Account 120
Account 300Account 300
5 - 5 - 1111© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Step 4:Step 4:Preparing the Trial BalancePreparing the Trial Balance
Trial BalanceTrial Balance
AssetsAssets $$$$$$
LiabilitiesLiabilities $$$$$$
EquityEquity $$$$$$
RevenuesRevenues $$$$$$
ExpensesExpenses $$$$$$Balance $$$Balance $$$
Balance $$$Balance $$$
Balance $$$Balance $$$
Balance $$$Balance $$$
Account 101Account 101
Balance $$$Balance $$$
5 - 5 - 1212© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 1313© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Step 5:Step 5:Adjusting and ReconcilingAdjusting and Reconciling
AccrualsAccruals DeferralsDeferrals
Error correctionsError corrections
AccruedAccrued revenuerevenue
AccruedAccrued expenseexpense
Deferred Deferred revenuerevenue
Deferred Deferred expenseexpense
5 - 5 - 1414© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Step 5:Step 5:Adjusting and ReconcilingAdjusting and Reconciling
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.
5 - 5 - 1515© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Step 5:Step 5:Adjusting and ReconcilingAdjusting and Reconciling
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.
5 - 5 - 1616© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Step 6:Step 6:Preparing Financial Preparing Financial
StatementsStatements
Work SheetWork SheetI/SI/S B/SB/S
StatementStatementof owners’of owners’
equityequity
BalanceBalancesheetsheet
IncomeIncomestatementstatement
5 - 5 - 1717© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 1818© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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 $$$
Balance $$$Balance $$$
Account 101Account 101
Balance $$$Balance $$$
5 - 5 - 1919© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 2Learning Objective 2
Distinguish between debits Distinguish between debits
and credits and apply and credits and apply
themthem
to the accounting equation.to the accounting equation.
5 - 5 - 2020© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
5 - 5 - 2121© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
The Accounting SystemThe Accounting Systemof Debits and Creditsof Debits and Credits
Left = Right
Debit Credit =
Assets Liabilities + Equity=
5 - 5 - 2222© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Effect of Debits and Credits Effect of Debits and Credits on Accounting Elementson Accounting Elements
Accounting ElementAccounting ElementAssetsAssetsLiabilitiesLiabilitiesEquityEquityRevenuesRevenuesExpensesExpensesOwners’ investmentsOwners’ investmentsDividendsDividendsGainsGainsLossesLosses
DebitsDebitsIncreaseIncreaseDecreaseDecreaseDecreaseDecreaseDecreaseDecreaseIncreaseIncreaseDecreaseDecreaseIncreaseIncreaseDecreaseDecreaseIncreaseIncrease
CreditsCreditsDecreaseDecreaseIncreaseIncreaseIncreaseIncreaseIncreaseIncreaseDecreaseDecreaseIncreaseIncreaseDecreaseDecreaseIncreaseIncreaseDecreaseDecrease
5 - 5 - 2323© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 3Learning Objective 3
Identify the normal balance ofIdentify the normal balance of
accounts and distinguishaccounts and distinguish
between permanent andbetween permanent and
temporary accounts.temporary accounts.
5 - 5 - 2424© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
5 - 5 - 2525© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Identify Normal BalanceIdentify Normal Balance
Debit Credit = Credit+
Assets Liabilities= Equity+
5 - 5 - 2626© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 4Learning Objective 4
Describe accounts, chartsDescribe accounts, charts
of accounts, journals,of accounts, journals,
ledgers, and worksheets.ledgers, and worksheets.
5 - 5 - 2727© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 2828© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 2929© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 5Learning Objective 5
Record transactionsRecord transactions
in journals.in journals.
5 - 5 - 3030© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 3131© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 3232© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 3333© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 6Learning Objective 6
Post transactions fromPost transactions from
the general journal tothe general journal to
the general ledger.the general ledger.
5 - 5 - 3434© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 3535© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Posting to the General Posting to the General LedgerLedger
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.
5 - 5 - 3636© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Posting to the General Posting to the General LedgerLedger
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.
5 - 5 - 3737© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Posting to the General Posting to the General LedgerLedger
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
20042004PostPostRef.Ref.
DateDate
DescriptionDescription
5 - 5 - 3838© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Posting to the General Posting to the General LedgerLedger
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
20042004PostPostRef.Ref.
DateDate
DescriptionDescription
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
20042004PostPostRef.Ref.
DateDate
DescriptionDescription
5 - 5 - 3939© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 7Learning Objective 7
Compute cash discounts Compute cash discounts
andand
determine the implicationdetermine the implication
of freight terms.of freight terms.
5 - 5 - 4040© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
5 - 5 - 4141© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 4242© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 8Learning Objective 8
Prepare a trial balance.Prepare a trial balance.
5 - 5 - 4343© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 4444© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 4545© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
5 - 5 - 4646© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
End of Chapter 5End of Chapter 5
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