Appendix A
Recording, Storing,
& Reporting
Accounting Information
App. A
Recording
• Accounting system - identifies, measures,
records, and retains accounting
information
• Account - records and retains the monetary
information from transactions
• General ledger - the entire set of accounts
that a company uses
App. A
Debits and Credits
Title of Account
Left (debit) side
Right (credit) side
• Debit entry - monetary amount recorded on
the left side
• Credit entry - monetary amount recorded on
the right side
App. A
Recording Rules
Asset accounts are:
• increased by debit entries
• decreased by credit entries
Liability accounts are:
• increased by credit entries
• decreased by debit entries
App. A
Recording Rules
Permanent owner’s
equity, or capital
accounts are:
• increased by
credit entries
• decreased by
debit entries
App. A
Recording Rules
Temporary owner’s equity accounts have the
following rules:
• Withdrawal accounts are increased by debit
entries and decreased by credit entries
• Revenue accounts are increased by credit
entries and decreased by debit entries
• Expense accounts are increased by debit entries
and decreased by credit entries
App. A
Recording Rules
• Double entry rule - the total amount of the
debit entries must equal the total amount of
the credit entries for each transaction.
• Balance of an account - the
difference between the total
increases and the total
decreases recorded in an
account.
App. A
Normal Balances
Assets
Liabilities
Owner’s capital
Owner’s withdrawals
Revenues
Expenses
Debit
Credit
Credit
Debit
Credit
Debit
App. A
Accounting Cycle
• Recording (journalizing) the transactions in
the general journal
• Posting the journal entries to the accounts
in the general ledger
• Recording (and posting) adjusting entries
• Preparing the financial statements
• Recording (and posting) closing entries
App. A
Recording (Journalizing)
Transactions
• General journal - a book where
information is recorded for each
transaction
• Journalizing - the process of
recording a transaction in the
general journal
• Journal entry - the recorded
information for each transaction
App. A
Key Procedures in
Journalizing
• Enter the month, day, and year
• Enter the title of the account and
amount to be debited
• Enter the title of the account and
amount to be credited
• Enter a brief explanation of the
transaction
App. A
Date
Illustration
of Journal Entries
Account Titles and Explanations
2003
Dec. 15 Cash
A. Cox, Capital
Acct.
No.
Debit
Credit
15,000
15,000
Made initial investment in business
29
Store Equipment
Cash
Notes Payable
Purchased store equipment from Ace Equipment
Company, making cash down payment and signing
3-month note
2,200
1,000
1,200
App. A
Posting to the Accounts
• Posting - the process of transferring the
journal entry information to the accounts in
the general ledger
• Chart of accounts - a numbering system
designed to organize a company’s accounts
App. A
Key Procedures in Posting
• Locate the first account to be posted from
the general journal
• Enter the month, day, and year of the
transaction and the debit amount in the
debit (left) side of the account
• Enter the account number in the general
journal
• Repeat the process for the credit amount
Illustration of Posting
Process - Exhibit A-7
App. A
Account Titles and Explanations
Date
2004
Jan. 2
Acct.
No.
Debit
101
Cash
Sales Revenue
Credit
300
300
401
Made cash sales
General Ledger
Cash
Bal.
1/02/04
7,300
300
No. 101
Sales Revenue
1/02/04
No. 401
300
App. A
Trial Balance
• Trial balance - a schedule that
lists the general ledger
accounts and the balances
• Normally prepared at the end
of the accounting period
before making adjusting
entries
• Helps to detect a journalizing
or posting error
App. A
Preparing Adjusting Entries
Adjusting entries - made at the end of an
accounting period to bring the company’s
revenue and expense account balances up-todate
Three types of adjusting entries
• Apportionment of prepaid and unearned items
• Recording of accrued items
• Recording or apportionment of estimated
items
App. A
Apportionment of Prepaid
and Unearned Items
• Prepaid item - an economic resource that
will be used in the near future
– the “expired” part of the resource cost must be
recorded as an expense
• Unearned revenue - an obligation of a
company to provide goods or services in the
future
– the “expired” part of the obligation must be
recorded as a revenue
App. A
Accrued Items
• Accrued expense - an expense that has been
incurred but that has not been paid or
recorded
• Accrued revenue - a revenue that has been
earned but that has not been collected or
recorded
• Adjusting entries must be made to record
the accrued expenses and revenues
App. A
Estimated Items
• Depreciation on buildings and equipment
• Amortization of intangible assets
• Recognition of uncollectible accounts
receivable
App. A
Adjusted Trial Balance
• A schedule prepared after adjusting entries
to prove the equality of the debit and credit
balances in the general ledger accounts
• Helps prevent the company from including
debit and credit errors in the financial
statements
• Makes preparing the financial statements
easier
App. A
Common Errors Found on
the Adjusted Trial Balance
• Transposition - two digits in a number are
mistakenly reversed
• Slide - the digits are listed in the correct
order but are mistakenly moved one decimal
place to the left or right
App. A
Preparing the Financial
Statements
• Income Statement
• Statement of Changes
in Owner’s Equity
• Balance Sheet
• Cash Flow Statement
App. A
Preparation of Closing
Entries
Closing entries are done at the end of an
accounting period to:
• Show the current balance in the owner’s
capital account
• Show zero balances in the revenue, expense,
and withdrawals accounts
Income Summary account is a temporary
account used in the closing process
App. A
Closing the Revenue
Accounts
• A debit entry is made to each revenue
account to bring the balance to zero
• A credit entry is made to the income
summary account for the total of the revenue
accounts
App. A
Closing the Expense
Accounts
• A credit entry is made to each
expense account to bring the
balance to zero
• A debit entry is made to the
income summary account for
the total of the expense
accounts
App. A
Closing the Income
Summary Account
• The balance in the account
is the net income
(or net loss)
• An entry is made to transfer
the balance in the income summary
account to the owner’s equity account
App. A
Closing the Withdrawals
Account
• A credit entry is made to the withdrawals
account to bring the balance to zero
• A debit entry is made to the owner’s equity
account for the total of the withdrawals
account
App. A
Post-Closing Trial Balance
• A schedule prepared after making the
closing entries to prove the equality of the
debit and credit balances in the permanent
accounts
• Only permanent accounts should have
balances since all temporary accounts have
zero balances due to the closing process
App. A
•
•
•
•
Modifications for
Corporations
Investments by owners
Distributions to owners
Income taxes on the income statement
Stockholders’ equity on the balance sheet
App. A
Conclusion
A company’s accounting cycle includes:
• recording (journalizing) transactions
• posting to the accounts
• recording and posting adjusting
entries
• preparing the financial statements
• recording and posting closing entries
App. A
Date
Jan. 2
Homework Problem PA-2 (2)
Account Titles and Explanations
Cash
R. Foster, Capital
To record investment by owner of cash into
business.
Acct.
No.
Debit
Credit
33,000
33,000
App. A
Date
3
Homework Problem PA-2 (2)
Account Titles and Explanations
Land
Building
Cash
Mortgage Payable
To record purchase of land and building; making
cash down payment and signing mortgage for
remaining balance.
Acct.
No.
Debit
Credit
3,000
21,000
6,000
18,000
App. A
Date
4
Homework Problem PA-2 (2)
Account Titles and Explanations
Office Equipment
Notes Payable
To record purchase of office equipment & issuance
of 1-year note.
Acct.
No.
Debit
Credit
7,000
7,000
App. A
Date
10
Homework Problem PA-2 (2)
Account Titles and Explanations
Office Supplies
Cash
To record purchase of office supplies for cash.
Acct.
No.
Debit
Credit
735
735
App. A
Date
21
Homework Problem PA-2 (2)
Account Titles and Explanations
Cash
Tax Service Revenues
To record collection of cash for services performed.
Acct.
No.
Debit
Credit
3,020
3,020
App. B
Date
31
Homework Problem PA-2 (2)
Account Titles and Explanations
Salary Expense
Cash
To record payment of employee’s salary.
Acct.
No.
Debit
Credit
1,450
1,450
App. A
Date
31
Homework Problem PA-2 (2)
Account Titles and Explanations
Utilities Expense
Cash
To record payment of January utilities.
Acct.
No.
Debit
Credit
88
88
App. A
Date
31
Homework Problem PA-2 (2)
Account Titles and Explanations
R. Foster, Withdrawals
Cash
To record withdrawal of cash by owner for personal
use.
Acct.
No.
Debit
Credit
850
850
App. A
Homework Problem PA-2 (4)
FOSTER TAX SERVICES COMPANY
Trial Balance
January 31
Account Titles
Cash
Office supplies
Land
Building
Office equipment
Notes Payable
Mortgage payable
R. Foster, capital
R. Foster, withdrawals
Tax service revenues
Salary expense
Utilities expense
Totals
Debits
$26,897
735
3,000
21,000
7,000
Credits
$ 7,000
18,000
33,000
850
3,020
1,450
88
$61,020
$61,020