The Accounting Process
Sid Glandon, DBA, CPA
Associate Professor of Accounting
1
Basic Accounting Equation
Assets = Liabilities + Owners’ Equity
 Owners’ Equity consists of

Revenues and gains, less
 Expenses and losses, plus
 Contributions by owners, less
 Withdrawals by owners, plus or less
 Other comprehensive income

2
Accounting Cycle


Identify transactions and/or events
Journalize transactions and/or events
 Post transactions and/or events
 Prepare unadjusted trial balance
 Prepare adjusting journal entries
 Prepare adjusted trial balance
 Prepare financial statements
 Journalize adjusting journal entries
 Post adjusting journal entries
 Journalize closing journal entries
 Post closing journal entries
 Prepare a post closing trial balance
3
Permanent Accounts
Assets
 Liabilities
 Owners’ Equity

4
Temporary Accounts
Revenue
 Gains
 Expenses
 Losses

5
Conversion from Cash to Accrual
Basis Accounting
Cash receipts
Less: cash disbursements
Cash basis income
Add:
Increases in current assets
Decreased in current liabilities
Subtract:
Decreases in current assets
Increases in current liabilities
Non cash charges (depreciation)
Accrual basis income
$100,000
(80,000)
$20,000
45,000
35,000
40,000
50,000
5,000
80,000
(95,000)
$5,000
6
Adjusting Journal Entries

Prepayments (deferrals)


Accruals


Cash received/paid before recognition of the
transaction
Cash received/paid after recognition of the
transaction
Estimates
Bad debt expense
 Amortization, depreciation and depletion

7
The Closing Process
Close revenue and gain accounts to the
income summary
 Close expense and loss accounts to the
income summary
 Close the income summary to retained
earnings
 Close dividends declared to retained
earnings

8
Account
Debit
Credit
Revenue and gain accounts
$180,000
Income summary
$180,000
To close revenue and gain nominal accounts to the income summary
Account
Debit
$175,000
Credit
Debit
$5,000
Credit
Income summary
Expense and loss accounts
$175,000
To close expense and loss nominal accounts to the income summary
Account
Income summary
Retained earnings
$5,000
To close the income summary nominal account to the income summary
9
Account
Debit
$10,000
Credit
Retained earnings
Dividends declared
$10,000
To close dividends declared nominal account to retained earnings
T-Account: Income Summary
Description
Debit
To close revenue and gain accounts
To close expense and loss accounts
$175,000
Subtotal (net income)
To close income summary
5,000
Ending balance
Credit
$180,000
5,000
$0
10
Company Name
Balance Sheet
Year End Date
Assets
Current assets:
Cash
$40,000
Accounts receivable
100,000
Total current assets
140,000
Property, plant and equipment (net)
500,000
Intangible assets (net)
20,000
Total Assets
$660,000
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable
$90,000
Accrued liabilities
15,000
Total current liabilities
105,000
Long-term debt
400,000
Total debt
505,000
Shareholders' equity:
Common stock
50,000
Retained earnings
105,000
Total shareholders' equity
155,000
Total liabilities and shareholders' equity
$660,000
Company Name
Statement of Income
For the Fiscal Period Ended
Sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Other income (expenses)
Income before income taxes
Income taxes
Net income
Earnings per share
$180,000
72,000
108,000
102,000
6,000
250
6,250
1,250
$5,000
$0.10
Company Name
Statement of Retained Earnings
For the Fiscal Period Ended
Beginning retained earnings
Net income
Less dividends declared
Ending retained earnings
$110,000
5,000
115,000
10,000
$105,000
Company Name
Statement of Cash Flows
For the Fiscal Period Ended
Cash flows from operating activities:
Net income
Add: amortization, depreciation, depletion
decreases in current assets
increases in current liabilities
Less: increases in current assets
decreases in current liabilities
Net cash flows provided by operating activities
Cash flows from investing activities:
Net cash flows provided by investing activities
Cash flows from financing activities:
Net cash flows provided by financing activities
Change in cash for the period
Beginning cash
Ending cash
$5,000
$5,000
40,000
50,000
(45,000)
(35,000)
15,000
20,000
0
0
20,000
20,000
$40,000