Fin. Accntng - Kieso Vol.1- Ch.3

Front 1

Accounting cycle: Steps

Back 1

1. Analyse transaction
2. Journalize transaction
3. Post transaction to general ledger (and sub-ledgers) accounts
4.Prepare (unadjusted) trial balance
5.Prepare necessary adjusting journal entries
6. Prepare (adjusted) trial balance
7. Prepare financial statements
8. Prepare closing journal entries for the year
9. Prepare post-closing trial balance (optional)
10. Prepare reversing entries (optional)

Hint 1

full cycle

Front 2

Example of Prepaid expenses

Back 2

Insurance
Supplies
Advertising
Rent

Front 3

Adjusting entry for
Supplies

Back 3

Dr. Supplies expense xxx
Cr. Supplies xxx

Where xxx – expired portion

Front 4

Event

Back 4

The cause of changes of assets, liabilities, and equity.

Front 5

Transaction

Back 5

A transfer or exchange between two or more entities or parties.

Front 6

Account

Back 6

Company records transactions in

separate accounts is used for each asset, liability, revenue, expense, gain, loss and capital.

Front 7

Permanent accounts
(or “real” accounts)

Back 7

Asset, liability, and equity accounts
Appear on the balance sheet
Permanent accounts are NOT closed at year end.

Front 8

Temporary accounts
(or “nominal” accounts)

Back 8

Revenue, expense, and dividend accounts
Revenue and expenses are on the income statement; dividends are on the equity statement
Temporary accounts are closed at year end.

Front 9

Journal

Back 9

a book of original entry for all transactions.

Front 10

General Journal

Back 10

a chronological listing of transactions expressed as debits and credits to particular accounts (known as a journal entry).

Front 11

Special Journals

Back 11

Used to summarize transactions with common characteristics (e.g. cash receipts, sales, purchases).

Front 12

Posting

Back 12

when the transaction information entered in the journal is transferred to the general ledger

Front 13

Ledger

Back 13

- Book (electronic database) containing all accounts
- Each account has a separate page

Front 14

General ledger

Back 14

contains all asset, liability, and all equity related accounts (capital, revenue, and expenses).

Front 15

Subsidiary ledger

Back 15

Leger containing details related to a specific general ledger account
(example: AR subsidiary ledger).

Front 16

Trial balance

Back 16

- Objective: prove Dr.= Cr.

- Listing of all accounts and their balances from the general ledger at a given point in time

- Prepared after end of period adjustments (called Adjusted Trial Balance) and possibly after closing entries (called Post-closing Trial Balance).

Front 17

Adjusting entries: Definition

Back 17

* Ensure that revenue recognition principle and matching occur during the period
* Entries made at the end of an accounting period
* Bring all accounts up to date on an accrual accounting basis

Front 18

Financial statements

Back 18

Final summaries of the accounting data for a specific time period

1.Balance Sheet-shows financial condition at a specific date
2. Income Statement-measures the results of operations during a period of time
3. Statement of Cash Flows-shows sources and uses of cash
4. Statement of Retained Earnings
Optional: Statement of Comprehensive Income
(or as part of Income Statement)

Front 19

The Accounting Equation

Back 19

A =L+OE
Assets = Liabilities +
Owners or Shareholders’ Equity

Assets = Liabilities + Capital + Retained Earnings

Assets = Liabilities + Capital + Revenues – Expenses – Dividends

Front 20

Retained Earnings

Back 20

Retained Earnings = Revenues – Expenses – Dividends

Front 21

To increase the balance of any account

Back 21

record the amount in the normal balance column

Front 22

To decrease the balance of any account

Back 22

record the amount in the column opposite to its normal balance

Front 23

Normal balances = balance increase

Back 23

Debit for Assets & Expenses
Credit for Revenue, Liabilities, OE,

Front 24

What increases Shareholders’ (or Owners’) Equity

Back 24

* Owners’ investments (common shares for corporation) or capital (for proprietor or partnership)
* Net Income

Front 25

What decreases Shareholders’ (or Owners’) Equity

Back 25

* Dividends (for corporation) or
withdrawals (for proprietor or
partnership)
* Net Loss

Front 26

Errors that may still exist after Trial Balance preparation.

Back 26

1. Transaction not recorded
2. Journal entry not posted
3. Journal entry posted twice
4. Incorrect accounts used in either the journal or posting
5. Offsetting errors made during recording

Front 27

Reasons for adjusting entries

Back 27

* To record events that are not journalized daily
* To record costswhich expire with time and are therefore not recorded
* To record items previously unrecorded

Front 28

Adjusting Entries: Prepayments

Back 28

1. Prepayments maid in
cash and recorded as
assets before item is used
(Prepaid Expenses) Prepaid expenses expire either with the passage of time (e.g. rent and insurance) or by being used and consumed (e.g. supplies) expenses

2. When payment is received in cash from customers for services/goods that will be provided in the future, it's recognized as liability (unearned revenue). e.g. Rent, magazine subscriptions, deposits.

Front 29

Adjusting Entries: Accruals

Back 29

1. Revenues earned but not
yet received in cash and not
recorded (Accrued Revenues)

2. Expenses incurred but
not yet paid in cash and not
recorded (Accrued Expenses). e.g. Interest expense, salaries expense, bad debts expense, interest earned.

Front 30

Example of adjusting journal entry for prepaid expenses.

Back 30

Example: Company paid $6,000 for one year insurance when coverage begins October 1. Adjust for Prepaid Insurance on Dec. 31 :

Dr Insurance Expense 1,500
Cr Prepaid Insurance 1,500

($6,000/12 * 3)

Front 31

Example of adjusting entry for unearned revenue.

Back 31

Example: Company received $12,000 for 12 months’ advertising services that begins Oct. 1.
$12,000 was credited to unearned revenue.
Adjustment required on December 31 :

Dr Unearned Revenue 3,000
Cr Service Revenue 3,000
($12,000/12 * 3)

Front 32

Adjusting Journal Entries for accrued expenses.

Back 32

Example: assume on January 5, a company pays $20,000 for salaries which includes $10,000 of salaries for December Adjustment required on December 31:

Dr Salaries Expense 10,000
Cr Salaries Payable 10,000

Front 33

Nominal accounts

Back 33

Revenue and Expense accounts

Front 34

Closing entries

Back 34

* made to close all revenue and expense accounts for the year
*The balances in these accounts are transferred to a clearing account (Income Summary)
*The balance in Income Summary represents net income or net loss for the period
* Real (or permanent) accounts are not closed
* The Dividends account is closed to retained earnings

Front 35

Closing Entries example

Back 35

1.Income Summary
Expense Accounts (Individually)

2. Revenue Accounts (Individually)
Income Summary

3. Income Summary
Retained Earnings

4. Retained Earnings
Dividends

Front 36

Closing Entries: Inventory

Back 36

*In a periodic inventory system, closing entries are made to record cost of goods sold and ending inventory

* In a perpetual inventory system, such entries are not required

Front 37

Classifications of adjusting entries:

Back 37

Prepaids:
1.Prepaid expenses
2.Unearned revenues

Accruals:
3.Accrued expenses
4.Accrued revenues