Starting the Accounting Cycle for a Service Business
Chapter 3
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Learning Objectives
1. Describe the standard form of a twocolumn journal.
2. Record business transactions in a twocolumn journal.
3. Prepare a chart of accounts.
4. Describe the balance form of account.
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Learning Objectives
5. Post from a two-column journal to ledger
accounts.
6. Prepare a trial balance from a ledger
after posting.
7. Describe the procedures for locating
and correcting errors in the accounting
process.
8. Make entries to correct errors in the
ledger.
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Sequence of steps and procedures
Used to record and summarize accounting data during
an accounting period
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Step 1 Analyze transactions from source documents.
Step 2 Record transactions in a journal.
Step 3 Post from the journal to the ledger.
Step 4 Prepare a trial balance of the ledger.
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Business documents or papers that prove business
transactions
The basis for journal entries
Provide objective evidence to support the journal
entries
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Learning Objective 1
Describe the standard form of a
two-column journal
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A record in which business transactions are
recorded in the order that they occur
AKA book of original entry
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1. Numbered pages, beginning with page 1
2. A Datecolumn to record transaction date
3. An Account Title column
 To record the accounts affected
 To record a brief explanation
4. A posting reference (P.R.) column
5. Two money (or amount) columns
 Labeled Debitand Credit, respectively
 Used to record the dollar amount
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1. Page number
2. A Date column
3. An Account Title column
4. A Posting Reference (P.R.) column
5. Debit and Credit columns
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Quick Check
The sequence of steps and procedures used by a
business to record and summarize accounting data is
known as the
a. accounting cycle.
b. balance form of account.
c. book of original entry.
d. accounting period.
e. principle of materiality.
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Learning Objective 2
Record business transactions in a
two-column journal
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Analyze into its debit and credit parts.
For each transaction, you must decide:
 Which accounts are affected by the transaction
 Were the accounts increased or decreased
 How to increase or decrease (debit or credit the
accounts affected
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Provide a brief explanation for each journal entry.
Notes telling someone not trained in accounting
what occurred in a transaction.
Writing them will reinforce your understanding of
transactions.
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???
When making journal entries, which is listed first?
Account being debited is alwayslisted first
Credit follows, indented
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No set format
Should be brief and easy to understand
Optional: may be omitted if purpose of entry is
obvious
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Example
Alice Browning starts an accounting and tax business by
investing $5,000 in the business on January 1, 20X1.
Analyze the account to be debited and the account to be credited.
Cash, an asset account, is increasing.
Assets are increased with debits.
Alice Browning, Capital, an equity account, is increasing.
Equity accounts are increased with credits.
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Example
Alice Browning starts an accounting and tax business by
investing $5,000 in the business on January 1, 20X1.
General Journal
Date
20X1
Jan.
Account Title
1
Cash
P.R.
Debit
Credit
5,000
Alice Browning, Capital
5,000
Invested cash in the
business.
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Review Quiz 3-1
Record each transaction in a general journal. Omit the
explanations.
Mar. 1, Becky invested $7,000 cash in her business.
General Journal
Date
20XX
Mar.
Account Title
1
Cash
P.R.
Debit
Credit
7,000
Becky McAfee, Capital
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7,000
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Review Quiz 3-1
Record each transaction in a general journal. Omit the
explanations.
Mar. 4, purchased supplies on credit, $750.
General Journal
Date
20XX
Mar.
Account Title
4
Supplies
P.R.
Debit
Credit
750
Accounts Payable
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750
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Review Quiz 3-1
Record each transaction in a general journal. Omit the
explanations.
Mar. 6, purchased equipment for cash, $475.
General Journal
Date
20XX
Mar.
Account Title
6
Equipment
P.R.
Debit
Credit
475
Cash
475
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Review Quiz 3-1
Record each transaction in a general journal. Omit the
explanations.
Mar. 9, paid half of the amount owed for supplies,
$375.
General Journal
Date
20XX
Mar.
Account Title
9
Accounts Payable
Cash
P.R.
Debit
Credit
375
375
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Entry requiring three or more accounts
Total debits will equal the total credits regardless of
the number of accounts involved in the journal entry
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Example
On July 25, 20X1, Susan King purchases equipment
for $10,000 by making a down payment of $3,500 with
the balance on account.
Analyze the account(s) to be debited and the account(s) to be
credited.
Equipment, an asset account, is increasing.
Assets are increased with debits.
Cash, an asset account, is decreasing.
Assets are decreased with credits.
Accounts Payable, a liability account, is increasing.
Liabilities are increased with credits.
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Example
On July 25, 20X1, Susan King purchases equipment for
$10,000 by making a down payment of $3,500 with the
balance on account.
Analyze the account(s) to be debited and the account(s) to be
credited.
General Journal
Date
20X1
Jul.
Account Title
25
Equipment
P.R.
Debit
Credit
10,000
Cash
3,500
Accounts Payable
6,500
Purchased equipment with a
down payment and the balance
on account.
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Provides a chronological (by order of date) record of
transactions
Provides a place to make an explanation of an entry, if
needed
Use lessens the possibility of recording an error,
because both the debit and credit parts are recorded
together
Easier to locate recording errors
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Quick Check
The process of recording transactions in a journal is
called
a. dailying.
b. transitioning.
c. journalizing.
d. footing.
e. ledgering.
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Review Quiz 3-2
Record each transaction in a general journal. Omit
Explanations.
Jun. 12, paid utilities expense, $145.
General Journal
Date
20X1
Jun.
Account Title
12 Utilities Expense
Cash
P.R.
Debit
Credit
145
145
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Review Quiz 3-2
John Dark’s business had the following transactions in
June 20X1. Record each transaction in a general
journal. Omit Explanations.
Jun. 17, John withdrew cash for personal use, $175.
General Journal
Date
20X1
Jun.
Account Title
17 John Dark, Drawing
Cash
P.R.
Debit
Credit
175
175
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Review Quiz 3-2
John Dark’s business had the following transactions in
June 20X1. Record each transaction in a general
journal. Omit Explanations.
Jun. 22, received cash for services performed, $950.
General Journal
Date
20X1
Jun.
Account Title
22 Cash
P.R.
Debit
Credit
950
Service Revenue
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950
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Review Quiz 3-2
John Dark’s business had the following transactions in
June 20X1. Record each transaction in a general journal.
Omit Explanations.
Jun. 25, John made the following additional investments
in his business: office supplies, $75; and a truck, $4,000.
General Journal
Date
20X1
Jun.
Account Title
25 Office Supplies
P.R.
Debit
Credit
75
4,000
Truck
John Dark, Capital
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4,075
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Learning Objective 3
Prepare a Chart of Accounts
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Account
Category
A listing of all accounts and
their account numbers
Assets (100-199)
Account
Number
Account
Title
111
112
Cash
Accounts
Receivable
Office
Supplies
Office
Equipment
Office
Furniture
113
116
A directory of accounts
available for making journal
entries
Includes only account titles
that may be used when
recording transactions in
the journal
117
Liabilities (200-299)
211
Accounts
Payable
Owner’s Equity
(300-399)
311
Stanley
Walker,
Capital
Stanley
Walker,
Drawing
312
Revenue (400-499)
411
Service
Revenue
Expenses (500-599)
511
512
Rent Expense
Repairs
Expense
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Quick Check
A directory or listing of accounts available in the
ledger is referred to as the
a. book of final entry.
b. book of original entry.
c. source document.
d. chart of accounts.
e. balance form of account.
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Learning Objective 4
Describe the balance form of account
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A record for each item in a business
The balance form of an account includes a
 Debit column
 Credit column
 Debit Balance column
 Credit Balance column
The four-column ledger account form shows a running
balance of each account
Ledger accounts not footed and balanced
Balance form of account widely used
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Quick Check
The ledger is often referred to as the book of
a. final entry.
b. numbers.
c. balances.
d. original entry.
e. materiality.
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Learning Objective 5
Post from a two-column journal to
ledger accounts
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1
1. The date of the journal entry is recorded in the Cash
account.
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2
2. The Cash account is debited for 10,000.
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3
3. The page number of the journal entry is recorded in
the P.R. column of the Cash account.
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4
4. The account number is recorded in the journal.
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5
5. Since this is the first number posted to the Cash
account, the balance is 10,000 and is recorded in
the balance debit column.
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1
1. The date of the journal entry is recorded in the
Owner’s Capital account.
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2
2. Stanley Walker, Capital is credited for 10,000.
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3
3. The page number of the journal entry is recorded in the
P.R. column of the Stanley Walker, Capital account.
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4
4. The account number is recorded in the journal.
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5
5. Since this is the first number posted to the Stanley
Walker, Capital account, the balance is 10,000 and is
recorded in the Balance Credit column.
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Quick Check
Which of the following represents the correct order of
the first four steps of the account cycle?
a. Analyze transactions, journalize, post to ledger,
prepare trial balance
b. Journalize, analyze transactions, post to ledger,
prepare trial balance
c. Analyze transactions, post to ledger, journalize,
prepare trial balance
d. Journalize, post to ledger, analyze transactions,
prepare trial balance
e. Journalize, post to ledger, prepare trial balance,
analyze transactions
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Learning Objective 6
Prepare a Trial Balance from a Ledger
after Posting
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Not a formal financial statement
A test of the equality of debits and credits in the
ledger
The order of accounts is consistent with the order on
the financial statements and the chart of accounts
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The purpose of the trial balance is to prove the
equality of the debits and credits.
Walker and Associates
Trial Balance November 30, 20X1
Account Title
Cash
Debit
Credit
9,525
Accounts Receivable
300
Office Supplies
125
Office Equipment
3,000
Office Furniture
2,000
Accounts Payable
4,000
Stanley Walker, Capital
10,000
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The purpose of the trial balance is to prove the
equality of the debits and credits.
Walker and Associates
Trial Balance November 30, 20X1
Account Title
Stanley Walker, Drawing
Debit
Credit
8,000
2,200
Service Revenue
Rent Expense
400
Repairs Expense
50
16,200
Totals
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16,200
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Quick Check
The four-column account form contains each of the
following columns except the
a. Debit Balance column
b. Credit Balance column
c. Credit column
d. Debit column
e. Difference column
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Review Quiz 3-3
Prepare a trial balance for the following accounts.
Account
Balance
Accounts Payable
$ 7,210
Cash
1,400
Equipment
16,400
LeAnn Lovering, Capital
14,600
LeAnn Lovering, Drawing
700
Rent Expense
3,000
Repairs Expense
450
Revenue from Services
16,380
Salaries Expense
2,510
Supplies
3,860
Truck
9,400
Utilities Expense
470
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Review Quiz 3-3
Answer:
LeAnn’s TV Repair Shop
Trial Balance December 31, 20XX
Account Title
Debit
Credit
Cash
1,400
Supplies
3,860
Equipment
16,400
Truck
9,400
Accounts Payable
7,210
LeAnn Lovering, Capital
14,600
LeAnn Lovering, Drawing
700
Revenue from Services
16,380
Rent Expense
3,000
Salaries Expense
2,510
Utilities Expense
470
Repairs Expense
450
Totals
16,200
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16,200
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Accounting errors can include
 Math errors
 Recording errors
 Posting errors
Errors cause the trial balance to be out of balance
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Learning Objective 7
Describe the procedure for locating and
correcting errors in the accounting process
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Posting
Recording
Transposition
Slide
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An amount correctly entered in the journal but
posted incorrectly to the ledger
Corrected by
 Drawing a line through the error
 Writing the correct figure above it
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A mistake made in a journal entry
Posting error
An incorrect transfer from the journal to an account
or from the ledger to the trial balance
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A type of posting error
Caused by the reversal of digits
Example: entering 240 for 420
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A type of posting error
Caused by an incorrectly placed decimal point
Examples: entering 100 for 1,000 or 24.50 for 245
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Quick Check
Each of the following errors will not cause the trial
balance to be out of balance except
a. Posting a transaction twice
b. Failing to record a transaction
c. Transposing digits in a posting
d. Failing to post an entry to the ledger
e. Recording a transaction twice
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Learning Objective 8
Make entries to correct errors in the ledger
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Type of Error
Method of Correction
Math error made in pencil
Erasure
Math error made in pen
Line out the incorrect figure, initial,
and enter the correct figure
Recording error discovered before
posting
Line out incorrect information, initial,
and enter correct information
Recording error that has been
posted
Correcting entry
An incorrect amount posted to the
correct account
Line out, initial, and enter the correct
amount
A correct amount posted to the
incorrect account
Correcting entry
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Quick Check
This type of error occurs in the process of transferring
figures from the journal to the ledger.
a. Math error
b. Recording error
c. Posting error
d. Omission error
e. Standard error
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Review Quiz 3-4
Indicate how the following error should be corrected.
1. A cash purchase of equipment was recorded as a
cash purchase of supplies. The entry has not been
posted to the ledger.
Answer:
Line out the title Supplies in the journal and write the
title Equipment above it.
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Review Quiz 3-4
Indicate how the following error should be corrected.
2. A journal entry for $470 was posted as $47 in one
of the accounts involved.
Answer:
Line out $47 in the ledger account and write $470 above
it.
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Review Quiz 3-4
Indicate how the following error should be corrected.
3. A cash payment of $50 for Repairs Expense was
journalized as a debit to Rent Expense and a credit
to Cash. The entry was then posted.
Answer:
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Review Quiz 3-4
Indicate how the following error should be corrected.
4. In a company with over $6,000,000 in annual sales,
it was discovered that the purchase of a $6.40
book of stamps was debited to Advertising
Expense, instead of Postage Expense.
Answer:
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Focus on Ethics
Refer to the Focus on Ethics box on page 109 in your text.
Why do you believe the plastic surgeon kept his
job at the clinic even though he admitted that
he had stolen several hundred thousands of
dollars?
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Joining the Pieces
The First Four
Steps in the
Accounting Cycle
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