Chapter 3
The Mechanics of
Accounting
Albrecht, Stice, Stice, Swain
COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are
trademarks used herein under license.
1
The Accounting Cycle
Step
Step
Step
1
2
3
Analyze transactions.
Record the effects of the transactions.
Summarize the effects of transactions.
1. Posting journal entries.
2. Preparing a trial balance.
Prepare reports.
Step
4
1. Adjusting entries.
2. Preparing financial statements.
3. Closing the books.
2
Analyze Transactions with the
Accounting Equation
A
=
L
+
OE
Borrow money
Invest in company
Pay off a note
Purchase
equipment
Borrow funds to
settle a debt
3
Terminology to Help Analyze
Transactions
• Account
– Accounting record where similar transactions
are recorded.
• T-Account
– Simplified depiction of an account.
• Debit
– Entry on the LEFT.
• Credit
Name of Account
Debit
Credit
– Entry on the RIGHT.
4
Double Entry Accounting
• Debits must ALWAYS equal credits!
– If for every transaction, debits equal credits,
then the accounting equation will balance.
5
Expanded Accounting Equation
Assets
Liabilities
=
+
Owners’ Equity
DR
CR
DR
CR
DR
CR
+
–
–
+
–
+
Capital Stock
DR
CR
DR
CR
–
+
–
+
Revenues
DR
–
Retained Earnings
CR
+
Expenses
Dividends
DR
CR
DR
CR
+
–
+
–
6
Assets + Expenses + Dividends = Liabilities + Capital Stock + Revenues
Journals and Journal Entries
• Journal
– An accounting record in which transactions are
originally entered.
– Chronological record.
General Journal Entry Format:
Date
Debit Entry . . . . . . . . . . . . . . xx
Credit Entry . . . . . . . . . . . .
xx
Explanation.
7
Journal Entries
3 steps for success:
1. Identify which accounts are involved.
2. Determine if the account is increased or
decreased.
3. Determine by how much the account
has changed.
8
Journal Entry Example
• You purchase $250 worth of inventory for
cash on January 30.
– Remember the 3 step process.
January 30
Inventory . . . . . . . . . . . . . . . $250
Cash . . . . . . . . . . . . . .
$250
To record purchase of inventory.
9
Compound Journal Entry
• Compound Journal Entry
– A journal entry that involves more than one
debit or more than one credit or both.
• You make a mortgage payment of $175. Of this,
$150 reduces the mortgage while $25 is interest.
Interest expense . . . . . . . . . . . $25
Mortgage payable . . . . . . . . . . $150
Cash . . . . . . . . . . . . . . . .
$175
To record monthly mortgage payment.
10
Posting Journal Entries
• Posting
– Transferring amounts from the journal to the
ledger.
• Ledger
– A book of accounts where journal transactions
are posted and thereby summarized.
• Chart of accounts
– A systematic listing of all accounts used by a
company.
11
The General Ledger
ACCOUNT: Cash
Date
Explanation
Account No. 101
Ref. Debits Credits
Jan. 1 Balance
Balance
100
2 Issued 100 shares of capital
stock at $10 per share
GJ1
3 Purchased equipment
GJ1
4 Sold inventory
GJ1
5 Monthly payment on loan
GJ1
6 Revenue
GJ1
1,000
1,100
300
60
860
230
2,500
800
630
3,130
After all the journal entries are posted to the ledger,
the account balance can be computed by summing
12
up all of the debits and credits.
The Trial Balance
• Trial Balance
– A listing of all account balances.
– Provides a means of ensuring debits equal
credits.
– From this data, the balance sheet and income
statement can be prepared.
– Prepared by listing all accounts and their
respective balances.
13
Example Trial Balance
The Example Company
Debits = Credits
Trial Balance
December 31, 2009
Debits
Cash
Accounts Receivable
Inventory
Land
Accounts Payable
Capital Stock
Retained Earnings
Sales Revenue
Cost of Goods Sold
Advertising Expense
Miscellaneous Expenses
Total
$
Credits
21
15
12
200
$
850
10
15
$ 1,123
30
150
24
919
______
$ 1,123
14
How Have Computers Changed
the Accounting Cycle?
• Allows businesses to calculate vast
amounts of data quickly.
• Eases posting of journal entries and
summarizing the data into reports and
financial statements.
• Computers can’t think. That is your job!