The Accounting Cycle
Capturing Economic Events
Chapter 3
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2012 The McGraw-Hill Companies, Inc.3-1
The Ledger
Cash
Accounts
Payable
Capital
Stock
Accounts are
individual records
showing increases
and decreases.
The entire group of
accounts is kept
together in an
accounting record
called a ledger.
3-2
The Use of Accounts
Increases are
recorded on one side
of the T account, and
decreases are
recorded on the
other side.
Title of Account
Left
or
Debit
Side
Right
or
Credit
Side
3-3
Debit and Credit Entries
Debits and credits affect accounts as follows:
A = L + OE
ASSETS
LIABILITIES
EQUITIES
Debit
Credit
for
for
Increase Decrease
Debit
Credit
for
for
Decrease Increase
Debit
Credit
for
for
Decrease Increase
3-4
The Journal
In an actual accounting system,
transactions are initially recorded in the
journal.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
2011
May 1 Cash
Capital Stock
8,000
8,000
Owners invest cash in the business.
3-5
Posting Journal Entries to the
Ledger Accounts
Posting simply
means updating the
ledger accounts for
the effects of the
transactions
recorded in the
journal.
3-6
Retained Earnings
A = L + OE
Capital
Stock
Retained
Earnings
The balance in the Retained Earnings account
represents the total net income of the corporation
over the entire lifetime of the business, less all
amounts which have been distributed to the
stockholders as dividends.
3-7
Accounting Periods
Time Period Principle
To provide users of
financial statements
with timely information,
net income is
measured for relatively
short accounting
periods of equal
length.
3-8
Revenue and Expenses
The price for
goods sold
and services
rendered during a
given accounting
period.
Increases
owners’ equity.
The costs of
goods and
services used up
in the process of
earning revenue.
Decreases
owner’s equity.
3-9
The Matching Principle: When
To Record Revenue
Matching Principle
Revenue should be
recognized at the
time goods are sold
and services are
rendered.
3-10
The Matching Principle: When
To Record Expenses
Matching Principle
Expenses should be
recorded in the
period in which they
are used up.
3-11
The Accrual Basis of Accounting
Current
Accounting Period
Jan. 1, 2011
Future
Accounting Period
Dec. 1, 2011
Cash is received or paid
here
Jan. 1, 2012
But . . .
Dec. 1, 2012
The income statement
reports revenue or
expense here
OR
The income statement
reports revenue or
expenses here
But . . .
Cash is received or paid
here
3-12
Debit and Credit Rules for
Revenue and Expenses
Expenses
decrease
owners’
equity.
EQUITIES
Debit
Credit
for
for
Decrease Increase
Revenues
increase
owners’
equity.
EXPENSES
REVENUES
Debit
Credit
for
for
Increase Decrease
Debit
Credit
for
for
Decrease Increase
3-13
Dividends
Payments to
owners
decrease
owners’
equity.
EQUITIES
Debit
Credit
for
for
Decrease Increase
DIVIDENDS
Debit
Credit
for
for
Increase Decrease
Owners’
investments
increase
owners’
equity.
CAPITAL STOCK
Debit
Credit
for
for
Decrease Increase
3-14
End of Chapter 3
3-15