Chapter 19th Edition A Review of the Accounting Cycle Intermediate Accounting James D Stice Earl K Stice PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University © 2014 Cengage Learning 2-1 The Accounting Process The The Recording Recording Phase Phase Business documents are analyzed Transactions are recorded Transactions are posted (continued) 2-2 The Accounting Process The The Reporting Reporting Phase Phase A trial balance of the accounts in the general ledger is prepared Adjusting entries are recorded Financial statements are prepared Nominal accounts are closed A post-closing trial balance may be prepared 2-3 Accounting Terminology • Transactions are events that transfer or change goods or services between or among two or more entities • Business documents, such as invoices, provide evidence that transactions have occurred as well as the data required to record the transactions in the accounting records 2-4 Accounting Terminology • Double-entry accounting is an old and universally accepted system for recording • accounting data Each transaction is recorded in a way that maintains the equality of the basic accounting equation: Assets = Liabilities + Owners’ Equity (continued) 2-5 Accounting Terminology • • • • A debit is an entry on the left side of an account A credit is an entry on the right side of an account Assets, expenses, and dividends are increased by debits and decreased by credits Liabilities, capital stock, retained earnings, and revenues are increased by credits and decreased by debits 2-6 Three-Step Journal Entry Process Identify the accounts involved with an event or transaction Determine whether each account increased or decreased (this information, coupled with the answer to step 1, will tell you if the account was debited or credited) Determine the amount by which each account was affected 2-7 Analyzing Business Documents • Normally, a business document, or source document, is the first record of each transaction • The business document provides support for the data to be recorded • in the journals Documents underlying each recorded transaction provide a means of verifying the accounting records and thus form a vital part of the information and control systems 2-8 Journalizing Transactions • • • Once the information provided on business documents has been analyzed, transactions are recorded in chronological order in the appropriate journal or journals A special journal is used to record a particular type of frequently recurring transaction The general journal is used to record all transactions for which a special journal is not maintained 2-9 Posting to the Ledger Accounts • • • An account is used to summarize the effects of transactions on each element of the expanded accounting A ledger is a collection of accounts equation maintained by a business The transfer of information from the journal to the appropriate accounts in the ledger is referred to as posting 2-10 Bad Debts (i) Rosi Inc.’s estimated Allowance for Bad Debts is to be increased by $1,100 Bad Debt Expense Allowance for Bad Debts To adjust for estimated bad debt expense 1,100 1,100 2-36 Adjusting Entry Summary • • Adjusting entries not involve cash Adjusting entries always involve a balance sheet account and an income statement account 2-37 Preparing Financial Statements Identify all revenues and expenses—these account balances are used to prepare the income statement Compute the net income—subtract expenses from revenues Compute the ending Retained Earnings balance Prepare a balance sheet using the balance sheet accounts from the trial balance and the modified retained earnings balance 2-38 Using a Spreadsheet • • Nominal (or temporary) accounts:  Closed to a zero balance at the end of each accounting period  All income statement accounts and the dividend account are closed Real (or permanent) accounts:  Not closed to a zero balance at the end of the accounting period  Carried forward to the next period 2-39 The Closing Process Revenues xx Retained Earnings Beg Bal xxx Revenues Bal xxx Since the revenue account is a nominal account, it is closed at the end of the period to Retained Earnings (continued) 2-40 The Closing Process Retained Earnings Expenses Expenses Bal xxx xx Beg Bal xxx Revenues Each expense account is credited in order to close the account at the end of the period (continued) 2-41 The Closing Process Retained Earnings The dividends account, which is also nominal, is credited to close out the balance Expenses Dividends Beg Bal xxx Revenues Dividends Bal xxx (continued) x x 2-42 The Closing Process Retained Earnings Retained Earnings is a real account and always carries a balance Net Income for the period is determined by these two items Expenses Dividends Beg Bal xxx Revenues Dividends reduce Retained Earnings 2-43 Post-Closing Trial Balance • • Provides a listing of all real account balances at the end of the closing process The post-closing trial balance is prepared to verify the equality of debits and credits for all real accounts 2-44 Accrual Accounting • • • Accrual accounting recognizes revenues as they are earned, not necessarily when cash is received Expenses are recognized as they are incurred, not necessarily when cash is paid Provides a better basis for financial reporting, according to the FASB 2-45 Cash-Basis Accounting • Cash-basis accounting is focused on cash receipts and cash disbursements • Typically used by service businesses, such as CPAs, dentists, and engineers • AICPA holds that it is appropriate for small service companies 2-46 Computers and Accounting • • • Many steps of the accounting cycle are performed using computers Typical computerized functions include generating reports and computational analysis The computer will never replace a good accountant! (continued) 2-47 Computers and Accounting A recent development in the use of computers in financial reporting is the spread of XBRI: • Stands for eXtensible Business Reporting Language • Is a method of embedding computer-readable tags in financial report documents • Allows a company to download its financial statements into spreadsheets where they can be compared to the financial statements of other companies that have also been downloaded 2-48 Chapter ₵ The The End End $ 2-49 2-50 ... record the transactions in the accounting records 2-4 Accounting Terminology • Double-entry accounting is an old and universally accepted system for recording • accounting data Each transaction... and dividends are increased by debits and decreased by credits Liabilities, capital stock, retained earnings, and revenues are increased by credits and decreased by debits 2-6 Three-Step Journal... recorded in a way that maintains the equality of the basic accounting equation: Assets = Liabilities + Owners’ Equity (continued) 2-5 Accounting Terminology • • • • A debit is an entry on the