CHAPTER F7
Accumulating
Accounting Data
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Learning Objective 1
Identify the eight
steps of the
accounting cycle.
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The Accounting Cycle
The accounting cycle
consists of a series of
steps repeated in each
accounting period that
enable the firm to
analyze, record, classify,
and summarize the
transactions into financial
statements.
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Steps of the Cycle
 Analyzing
 Adjusting the
Transactions
 Journalizing
Transactions
 Posting Transactions
to the General Ledger
 Preparing a Trial
Balance or Worksheet
Accounts
 Preparing Financial
Statements
 Preparing and
Posting Closing
Entries
 Preparing the PostClosing Trial Balance
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Step 1: Analyzing Transactions
 Part One: Determine when a
transaction occurs. A transaction is any
event that results in a change in the
amount of an accounting element.
 Part Two: Identify the nature of the
transaction. This entails determining
which accounting elements were
affected and by how much.
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Step 2: Journalizing
Transactions
 A journal is a book of original entry that
contains a chronological list of an entity’s
transactions.
 A special journal records specific types of
transactions such as a sales, purchases,
cash receipts or cash payments.
 A general journal records all transactions
not recorded in a special journal.
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Step 3: Posting to the Ledger
 A ledger contains all the accounts of a
firm.
 A chart of accounts is a list of all of the
accounts used by a company.
 After transactions are entered in the
journal, the same information is then
posted to the ledger accounts. The ledger
accounts indicate the current balance for
each account.
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Step 4: Preparing a Trial
Balance
 Periodically, usually weekly or monthly, a
trial balance is prepared. A trial balance is
a listing of all ledger accounts and their
balances.
 The trial balance verifies that the
accounting equation is in balance.
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Using a Worksheet
 Another option for step 4 of the cycle is to
prepare a worksheet. The worksheet is a
ten column worksheet which begins with
the trial balance.
 A worksheet helps accountants examine
the accounts, adjust the accounts, and
gather the data to prepare the financial
statements.
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Step 5: Adjusting the
Accounts
 Some account balances require adjustment
at the end of the accounting period, before
the financial statements are prepared.
 Adjustments are needed to ensure the proper
application of the revenue recognition and
expense recognition rules. Many
adjustments are accruals and deferrals
studied in Chapter Six.
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Reconciling the Bank Account
 Adjusting entries normally do not affect
the cash account, except for one
adjustment that is needed to change the
cash balance to the correct amount as of
the end of the period.
 A bank reconciliation is prepared to
determine the appropriate cash balance as
part of the firm’s internal control structure.
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Step 6: Preparing Financial
Statements
 After all of the balances in the general
ledger accounts have been properly
adjusted, the financial statements can be
prepared.
 The income statement is prepared first,
then the statement of retained earnings (or
owners’ equity), then the balance sheet.
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Step 7: Preparing Closing
Entries
 Closing entries are prepared to reset the
balance of temporary accounts to zero.
 Temporary (or nominal) accounts include all
income statement accounts plus dividends or
owner withdrawals. Temporary accounts are
closed at the end of the period.
 Most balance sheet accounts are permanent
(or real) accounts and are not closed.
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Step 8: Preparing the
Post-Closing Trial Balance
 After closing entries have been journalized
and posted, only the balance sheet
accounts should have a balance other
than zero.
 A post-closing trial balance provides
verification that the closing process was
completed properly and also serves as a
record of the beginning account balances
for the next accounting period.
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The Accounting Equation
 An accounting system is based on the
following equation:
 Assets = Liabilities + Equity
 If one side of the equation is changed, the
other side must also change, this is the
basis of the double-entry system.
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Learning Objective 2
Distinguish between
debits and credits and
apply them to the
accounting equation.
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Debits and Credits
 Two of the most familiar accounting terms
are debits and credits. In the doubleentry system, debits must always equal
credits.
 Debit means the left side of the account
and is abbreviated as DR.
 Credit means the right side of the account
and is abbreviated as CR.
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Normal Balance
 Accounts have a normal balance.

Left = Right

Assets = Liabilities + Equity

Debit = Credit
 Remember there are five components of
equity which have differing normal
balances.
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Normal Balances
 Assets = debits
 Liabilities = credits
 Owner’s contributions = credits
 Owner’s distributions = debits
 Revenues = credits
 Expenses = debits
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A Debit
 Increases assets.
 Decreases liabilities.
 Decreases owner’s capital or capital stock
accounts.
 Increases withdrawal or dividend
accounts.
 Decreases revenues or gains.
 Increases expenses and losses.
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A Credit
 Decreases assets.
 Increases liabilities.
 Increases owner’s capital or capital stock
accounts.
 Decreases withdrawal or dividend
accounts.
 Increases revenues or gains.
 Decreases expenses and losses.
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Learning Objective 3
Describe accounts,
journals, ledgers, and
worksheets.
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The Account
 Each accounting element is represented
by a separate account. The following
information is required:
Account name and number
 Date of each transaction
 Beginning balance for the period
 Each posted transaction from the journal
including the date, reference, and amount
 Ending balance for the period

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T-Accounts
 For illustration purposes, accountants will
often use a T-account. A T-account is a
simplified version of the real account
format used in the accounting records.
 In a T-account, you can see the effect of
various transactions on any particular
account. Debits, credits, and balances
can all be shown with clarity.
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T-Account Format
Any Account
DEBIT
(Left
Side)
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CREDIT
(Right
Side)
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T-Accounts for Assets
ANY ASSET
NORMAL
BALANC
E
Debit
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Credit
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T-Accounts for Liabilities
ANY LIABILITY
Debit
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NORMAL
BALANCE
Credit
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T-Accounts for Owner’s
Contributions or Capital Stock
ANY OWNERS’ CONTRIBUTIONS
OR CAPITAL STOCK
Debit
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NORMAL
BALANCE
Credit
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T-Accounts for Owner’s
Withdrawals or Dividends
ANY OWNERS’ WITHDRAWALS
OR DIVIDENDS
Debit
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NORMAL
BALANCE
Credit
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T-Accounts for Revenues/Gains
and Expenses/Losses
ANY EXPENSE
OR LOSS
NORMAL
BALANCE
Debit
Credit
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ANY REVENUE
OR GAIN
Debit
NORMAL
BALANCE
Credit
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Summarizing the
Rules of Debits and Credits
Normal
Increase Decrease Balance
Assets
DR
CR
DR
Liabilities
CR
DR
CR
Owners’ equity CR
DR
CR
Revenues
CR
DR
CR
Expenses
DR
CR
DR
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Illustration Using T-Accounts
 Let’s use T-accounts to analyze the effect
on the accounting elements of three basic
business transactions.
 In each case, we will:
Determine the accounts affected
 Apply the rules of debits and credits
 Enter the appropriate amount

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Learning Objective 4
Record transactions in
journals and post them to
the general ledger.
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Transaction #1
Record the initial sale of stock by a new
corporation, 10,000 shares of no-par
stock at $10 per share.
CASH
100,000
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COMMON STOCK
100,000
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Transaction #2
The new corporation purchased
equipment for $20,000 cash.
EQUIPMENT
20,000
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CASH
20,000
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Transaction #3
The firm purchased supplies for $2,000 cash.
SUPPLIES
2,000
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CASH
2,000
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Summary of the Cash Account
After the first three transactions, the cash
account would look like this:
CASH
100,000
20,000
2,000
balance 78,000
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Journal Entries
 Remember that the T-accounts are for
illustration purposes only.
 Real accounting systems rely on journal
entries and ledger accounts.
 Entries are made in a journal to formally
record each event for the company. Using
the same three transactions, the journal
will look like the example on the next slide.
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General Journal
Date
Description
2007
March 28 Cash
Common stock
Page 1
Post
Ref
Debit
Credit
100,000
100,000
Issued 10,000 shares of no-par stock
March 28 Equipment
Cash
20,000
20,000
Purchased office equipment
March 28 Supplies
Cash
2,000
2,000
Purchased office supplies
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Posting to the Ledger
 After the journal entries are made, the
debits and credits need to be posted to
the appropriate ledger accounts on a
periodic basis.
 The next slide will show the result of
having posted the three transactions to the
cash account.
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Cash General Ledger Account
Name of Account: CASH
Account No. : 100
Date
2007
Description
Post
Ref
Debit
Credit
Mar 28 Beginning balance
Mar 28 Stock sale
Mar 28 Purchase equipment
Mar 28 Purchase supplies
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Balance
Debit
Credit
100,000
100,000
20,000
80,000
2,000
78,000
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Compound Journal Entries
 Journal entries with more than two accounts affected
are called compound journal entries. Assume we buy
a $25,000 delivery truck with a $5,000 cash down
payment.
General Journal
Date
Description
2007
March 30 Truck
Cash
Notes payable
Page 1
Post
Ref
Debit
Credit
25,000
5,000
20,000
Purchased delivery truck
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Learning Objective 5
Prepare trial balances
and worksheets.
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Trial Balance
 Prepare a list of the entire general ledger
accounts with their corresponding debit or
credit balances.
 Total each column of debits and credits.
 The debit and credit totals should be
equal.
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Trial Balance
Cash
Inventory
Accounts Payable
Jones, Capital
Jones, Withdrawals
Revenues
Expenses
Total
Russell Jones Company
Trial Balance
December 31, 2007
Debits
$125,000
128,000
Credits
$ 90,000
85,000
45,000
200,000
77,000
$375,000
$375,000
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Learning Objective 6
Prepare adjusting journal
entries and reconcile a
bank account.
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Adjusting Entries
 As discussed in Chapter 6, there are
various accounts that require adjustment
prior to the preparation of the financial
statements.
 Example of adjustments include: accrued
interest expense or revenue, accrued
wages, deferred service revenues, and the
like.
 These adjustments must be journalized.
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Bank Reconciliation
 Along with the typical adjustments for
accruals, deferrals, and depreciation, the
bank statement needs to be analyzed for
any additional adjustments.
 Typically, the cash account needs to be
adjusted and the amount of the adjustment
is determined by preparing a bank
reconciliation.
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Reconciling the
Bank Statement
 Follow the steps as outlined on the bank
reconciliation form.
 The bank statement balance is reconciled
to a corrected bank balance.
 The balance per books (from the cash
account in the general ledger) is
reconciled to a corrected book balance.
 Both balances should be the same!
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Bank Reconciliation - Top Half
Balance per Bank Statement (4/30/07)
Add: Deposits in Transit
4/29
$ 450.00
4/30
320.90
Deduct Checks Outstanding
#1087 $ 115.00
#1088
65.50
#1090
24.90
#1092
215.75
Corrected Bank Balance (4/30/07)
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$ 3,625.25
770.90
(421.15)
$ 3,975.00
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Bank Reconciliation - Bottom Half
$ 3,994.28
Balance per Books (4/30/07)
Add:
Credit memo: interest earned
Credit memo: deposit error
$
65.75
22.22
87.97
88.50
18.75
(107.25)
Deduct:
Debit memo: NSF check
Monthly service charge
$
Corrected Book Balance (4/30/07)
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$ 3,975.00
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Learning Objective 7
Prepare financial
statements from a
worksheet.
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Preparing Financial Statements
 After all accounts have been adjusted, the
financial statements can be prepared.
 At this point, you should be able to
prepare the three financial statements
shown in Chapter 6:
(1) the income statement,
 (2) the statement of owner’s (stockholders’)
equity, and
 (3) the balance sheet.

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Learning Objective 8
Prepare closing
journal entries.
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Closing the Accounts
 After the year-end financial statements have
been prepared, the temporary (or nominal)
accounts are closed. Closing an account
means that the account will have a zero
balance after the entry is journalized and
posted.
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Closing the Accounts
 Balance sheet accounts (permanent or
real accounts) are not closed, their
ending balance becomes the beginning
balance for the next period.
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Preparing Closing Entries
 There are four closing entries:
 Close all revenue accounts to Income Summary
 Close all expense accounts to Income Summary
 Close Dividends to Retained Earnings, or close
Withdrawals to the Owners’ Capital account(s)
 Close Income Summary to Retained Earnings or
to the Owners’ Capital account(s)
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Trial Balance Before
Closing Entries
Cash
Inventory
Accounts Payable
Jones, Capital
Jones, Withdrawals
Revenues
Expenses
Total
Russell Jones Company
Trial Balance
December 31, 2007
Debits
$125,000
128,000
Credits
$ 90,000
85,000
45,000
200,000
77,000
$375,000
$375,000
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Preparing the Closing Entries
General Journal
Date
Description
2007
Dec
31 Revenues
Income Summary
Page 1
Post
Ref
Debit
Credit
200,000
200,000
To close the revenue accounts.
Dec
31 Income Summary
Expenses
77,000
77,000
To close the expense accounts.
Dec
31 Income Summary
Jones, Capital
123,000
123,000
To close income summary.
Dec
31 Jones, Capital
Jones, Withdrawals
45,000
45,000
To close withdrawals.
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Learning Objective 9
Prepare a post-closing
trial balance.
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Post-Closing Trial Balance
 The final step in the accounting cycle is to
prepare a post-closing trial balance.
 Since the nominal accounts have all been
closed, only the real accounts will appear
in the post-closing trial balance.
 These account balances also serve as the
opening balances for the next accounting
period.
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Post-Closing Trial Balance
Russell Jones Company
Post-Closing Trial Balance
December 31, 2007
Cash
Inventory
Accounts Payable
Jones, Capital
Total
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Debits
$125,000
128,000
$253,000
Credits
$ 90,000
163,000
$253,000
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The End
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