THE ACCOUNTING CYCLE ANALYZING TRANSACTIONS

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1 THE ACCOUNTING CYCLE ANALYZING Accounting deals only with economic. Did you pay or receive money? Are you owed or do you owe money? If any of these circumstances exist, you must record the transaction.

2 RECORDING All accounting must be recorded in the General Journal. We call this JOURNALIZING. (Creative, eh?) JOURNALIZING We journalize each and every transaction using the DOUBLE-ENTRY ACCOUNTING method. This means that every journal entry you make must have (at least) one DEBIT entry and (at least) one CREDIT entry. RECORDING Every transaction, and therefore every Journal entry, will affect at least two different. Each type of account will have a normal DEBIT or a normal CREDIT, depending on the type of account it is. The normal side is the side the account will increase on Jan.1 Cash 10,000 F.K. McPhee, Capital 10,000 To record owner s investment Jan.2 Equipment Cash To record purchase of equipment 8,000 8,000 Note: the set up of the GJ is very important. Each simple entry (that is, affecting just two ) will take three lines. Do not put anything in the Posting Reference column until you post your entries to the General Ledger. When you post, you will put the General Ledger account number (that is, of the account to which you post) in that column.

3 POSTING Once you have journalized your, you must post each journal entry to the GENERAL LEDGER affected. Every every Journal entry will be posted to at least two different GENERAL LEDGER. For simplicity s sake, we sometimes use T-. Jan.1 Jan.2 Do not put anything in the Explanation column! J1 J1 10,000 8,000 DR DR 10,000 2,000 The reference to DR or CR is with respect to the BALANCE not the entry. Jan.2 J1 8,000 DR 8, Prepare trial Jan.1 J1 10,000 CR 10,000

4 PREPARING A TRIAL BALANCE Once you have posted each journal entry to the GENERAL LEDGER affected, you must prepare a TRIAL BALANCE. A Trial Balance simply proves that the debit and credit entries you have made equal each other. PREPARING A TRIAL BALANCE A Trial Balance is a list of all and their s. Accounts are listed in the order in which they appear in the General Ledger: Current Assets, Fixed Assets, Liabilities, Owner s Equity, Drawings, Revenues, Expenses This is for illustration purposes only. Do not include with zero s. Based on the entries for Fitness King so far, this is really what our Trial Balance would look like.

5 PREPARING THE INCOME STATEMENT Once you have a Trial Balance, you can prepare Financial Statements (Income Statement, Statement of Owner s Equity, and Balance Sheet), however, you probably want to wait until you have done your adjusting entries Always do your Income Statement first. The are in the same order as on the Trial Balance If there is only one Revenue account, put its in the right-hand column. 4. Prepare trial 5. Journalize and post adjusting entries ADJUSTING ENTRIES Because accurate Financial Statements can only be made if we reflect income and expenses earned and incurred during a relevant reporting period (month, quarter, year) we must make ADJUSTING ENTRIES.

6 ADJUSTING ENTRIES We adjust for items that we have paid in advance (prepaid rent, prepaid insurance) Or for which we have been paid in advance (unearned revenues) (sometimes) Or for expenses that we have incurred but still owe at the end of the reporting period (employees salaries, utilities) ADJUSTING ENTRIES We record adjusting entries just like regular journal entries, except: They are always dated on the last date of the reporting period (month, quarter, year) They always affect one sheet account and one income statement account (revenues and expenses). CASH is never affected by an adjusting entry. WORK SHEET ILLUSTRATION Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit 4. Prepare trial 1. Prepare trial on the worksheet. 2. Enter adjustment data. 3. Enter adjusted s 4. Extend adjusted to appropriate columns. 5. Calculate income/loss and complete the worksheet. 6. Prepare adjusted trial 5. Journalize and post adjusting entries