McGraw-Hill /Irwin 2009 The McGraw-Hill Companies, Inc.

REVIEW OF THE
ACCOUNTING PROCESS
Chapter 2
Slide 2
2-2
Accounting Equation for a Corporation
A = L + SE
+ Retained Earnings + Paid-in Capital
- Expenses
- Losses
+ Revenues
+ Gains
- Dividends

Slide 3
2-3

Account Relationships
Debits and credits affect the Balance Sheet
Model as follows:
A = L + PIC + RE
Assets
Dr.
+
Cr.
-
Liabilities
Dr.
-
Cr.
+
Paid-in
Capital
Dr.
-
Cr.
+
Retained
Earnings
Dr.
-
Cr.
+
Revenues
and Gains
Dr.
-
Cr.
+
Expenses
and Losses
Dr.
+
Cr.
-
Permanent Accounts
Temporary Accounts
Slide 4
2-4
Source
documents
Record in
Journal
Financial
Statements
Transaction
Analysis
Post to
Ledger
Unadjusted
Trial Balance
Record & Post
Adjusting
Entries
Adjusted
Trial Balance
Close Temporary
Accounts
Post-Closing
Trial Balance
The
Accounting
Processing
Cycle
During the Accounting Period
At the End of the Accounting Period
At the End
of the Year
Slide 5
2-5
Accounting Processing Cycle
On January 1, $40,000 was borrowed from a
bank and a note payable was signed.
Prepare the journal entry.
Two accounts are affected:
Cash (an asset) increases by $40,000.
Notes Payable (a liability) increases by $40,000.
GENERAL JOURNAL Page 1
Date Description
Post.
Ref. Debit Credit
Jan 1 Cash 40,000
Notes Payable 40,000
Slide 6
2-6
General Ledger
The T account is a shorthand format of an account
used by accountants to analyze transactions.
It is not part of the bookkeeping system.
GENERAL LEDGER
Account: Acct. No. ##
Balance
Date Item
Post.
Ref. Debit Credit DR (CR)

Slide 7
2-7
Posting Journal Entries
2-8
Account Title Debits Credits
Cash 68,500 $
Accounts receivable 2,000
Supplies 2,000
Prepaid rent 24,000
Inventory 38,000
Furniture and fixtures 12,000
Accounts payable 35,000 $
Notes payable 40,000
Unearned rent revenue 1,000
Common stock 60,000
Retained earnings 1,000
Sales revenue 38,500
Cost of goods sold 22,000
Salaries expense 5,000
Total 174,500 $ 174,500 $
Dress Right Clothing Corporation
Unadjusted Trial Balance
July 31, 2009
After recording all entries for the period, Dress Rights
Unadjusted Trial Balance would be as follows:
Debits = Credits
A Trial
Balance is a
listing of all
accounts
and their
balances at
a point in
time.
Slide 9
2-9
Transactions where
cash is paid or received
before a related
expense or revenue is
recognized.
Transactions where
cash is paid or received
after a related expense
or revenue is
recognized.
Adjusting Entries
Prepayments Accruals Estimates
Accountants must often
make estimates in order
to comply with the
accrual accounting
model.
At the end of the period, adjusting entries are
required to satisfy the realization principle and
the matching principle.
Slide 10
2-10
Asset
Expense
Unadjusted
Balance
Credit
Adjustment
Debit
Adjustment
Prepaid Expenses
Today, I will pay
for my first
6 months rent.
Prepaid Expenses
Items paid for in advance
of receiving their benefits
Slide 11
2-11
Depreciation is the process of computing
expense by allocating the cost of plant and
equipment over their expected useful lives.
Straight-Line
Depreciation
Expense
=
Asset Cost - Salvage Value

Useful Life
Depreciation
Slide 12
2-12
Liability
Revenue
Unadjusted
Balance
Credit
Adjustment
Debit
Adjustment
Unearned Revenues
Go Streaks
Buy your season tickets for
all home basketball games NOW!
Unearned Revenue
Cash received in
advance of performing
services
Slide 13
2-13
Alternative Approach to Record Prepayments
Unearned Revenue
Record initial cash receipts
as follows:
Cash $$$
Revenue $$$
Adjusting Entry
Record the amount for the
unearned liability as
follows:
Revenue $$$
Unearned revenue $$$
Prepaid Expenses
Record initial cash
payments as follows:
Expense $$$
Cash $$$
Adjusting Entry
Record the amount for the
prepaid expense as
follows:
Prepaid expense $$$
Expense $$$
Slide 14
2-14
Expense
Liability
Credit
Adjustment
Debit
Adjustment
Accrued Liabilities
I wont pay you
until the job is done!
Accrued Liabilities
Liabilities recorded when an
expense has been incurred
prior to cash payment.
Slide 15
2-15
Asset
Revenue
Credit
Adjustment
Debit
Adjustment
Accrued Receivables
Yes, you can pay me
in May for your April
15 tax return.
Accrued Receivables
Revenue earned in a
period prior to the cash
receipt.
Slide 16
2-16
Estimates
Uncollectible
accounts and
depreciation of fixed
assets are estimated.

An estimated item is
a function of future
events and
developments.
$
Slide 17
2-17
Estimates
Page 30
Date Description
Post.
Ref. Debit Credit
July 31 Bad Debt Expense 500
Allowance for Uncollectible
Accounts 500
GENERAL JOURNAL
2-18
DRESS RIGHT CLOTHING CORPORATION
Adjusted Trial Balance
July 31, 2009
Account Title Debits Credits
Cash 68,500 $
Accounts receivable 2,000
Allowance for uncollectible accounts 500 $
Supplies 1,200
Prepaid rent 22,000
Inventory 38,000
Furniture and fixtures 12,000
Accumulated depr.-furniture & fixtures 200
Accounts payable 35,000
Note payable 40,000
Unearned rent revenue 750
Salaries payable 5,500
Interest payable 333
Common stock 60,000
Retained earnings 1,000
Sales revenue 38,500
Rent revenue 250
Cost of goods sold 22,000
Salaries expense 10,500
Supplies expense 800
Rent expense 2,000
Depreciation expense 200
Interest expense 333
Bad debt expense 500
Totals 181,033 $ 181,033 $
This is the Adjusted
Trial Balance for
Dress Right after all
adjusting entries have
been recorded and
posted.
Dress Right will use
these balances to
prepare the financial
statements.
Slide 19
2-19
Dress Right Clothing Corporation
Income Statement
For Month Ended July 31, 2009
Sales revenue 38,500 $
Cost of goods sold 22,000
Gross profit 16,500
Other expenses:
Salaries 10,500 $
Supplies 800
Rent 2,000
Depreciation 200
Bad debt 500
Total operating expenses 14,000
Operating income 2,500
Other income (expense):
Rent revenue 250
Interest expense (333) (83)
Net income 2,417 $
The income statement summarizes the results
of operating activities of the company.
Slide 20
2-20
Current assets:
Cash 68,500 $
Accounts receivable 2,000 $
Less: Allowance for uncollectible accounts 500 1,500
Supplies 1,200
Inventory 38,000
Prepaid rent 22,000
Total current assets 131,200
Property and equipment:
Furniture and fixtures 12,000
Less: Accumulated depreciation 200 11,800
Total assets 143,000 $
Dress Right Clothing Corporation
Balance Sheet
At July 31, 2009
Assets
The balance sheet presents the financial
position of the company on a particular date.
Slide 21
2-21
Current liabilities:
Accounts payable 35,000 $
Salaries payable 5,500
Unearned rent revenue 750
Interest payable 333
Note payable 10,000
Total current liabilities 51,583
Long-term liabilities:
Note payable 30,000
Shareholders' equity:
Common stock 60,000 $
Retained earnings 1,417
Total shareholders' equity 61,417
Total liabilities and shareholders' equity 143,000 $
Dress Right Clothing Corporation
Balance Sheet
At July 31, 2009
Liabilities and Shareholders' Equity
Notice that assets of $143,000 equal total
liabilities plus shareholders equity of $143,000.
Slide 22
2-22
The statement of cash flows discloses the
changes in cash during a period.
Cash flows from operating activities:
Cash inflows:
From customers 36,500 $
From rent 1,000
Cash outflows:
For rent (24,000)
For supplies (2,000)
To suppliers for merchandise (25,000)
To employees (5,000)
Net cash used by operating activities (18,500) $
Cash flows from investing activities:
Purchase of furniture and fixtures (12,000)
Cash flows from financing activities:
Issue of capital stock 60,000 $
Increase in notes payable 40,000
Payment of cash dividend (1,000)
Net cash provided by financing activities 99,000
Net increase in cash 68,500 $
Dress Right Clothing Corporation
Statement of Cash Flows
For the Month of July 2009
Slide 23
2-23
The statement of shareholders equity
presents the changes in permanent
shareholder accounts.
Common
Stock
Retained
Earnings
Total
Shareholders'
Equity
Balance at July 1, 2009 - $ - $ - $
Issue of capital stock 60,000 60,000
Net income for July 2009 2,417 2,417
Less: Dividends (1,000) (1,000)
Balance at July 31, 2009 60,000 $ 1,417 $ 61,417 $
Dress Right Clothing Corporation
Statement of Shareholders' Equity
For the Month of July 2009
Slide 24
2-24
Temporary
Accounts
Revenues
Income
Summary
E
x
p
e
n
s
e
s

D
i
v
i
d
e
n
d
s

Permanent
Accounts
Assets
L
i
a
b
i
l
i
t
i
e
s

S
h
a
r
e
h
o
l
d
e
r
s

E
q
u
i
t
y

The closing process applies
only to temporary accounts.
Temporary and Permanent Accounts
Retained
Earnings
Slide 25
2-25
CLOSING ENTRIES
Two Objectives of Closing Entries:

1.Set the Temporary Accounts (Income Statement
accounts and Dividends) to zero.

2.Update the Retained Earnings account (include
current period earnings and dividends).

2-26
DRESS RIGHT CLOTHING CORPORATION
Adjusted Trial Balance
July 31, 2009
Account Title Debits Credits
Cash 68,500 $
Accounts receivable 2,000
Allowance for uncollectible accounts 500 $
Supplies 1,200
Prepaid rent 22,000
Inventory 38,000
Furniture and fixtures 12,000
Accumulated depr.-furniture & fixtures 200
Accounts payable 35,000
Note payable 40,000
Unearned rent revenue 750
Salaries payable 5,500
Interest payable 333
Common stock 60,000
Retained earnings 1,000
Sales revenue 38,500
Rent revenue 250
Cost of goods sold 22,000
Salaries expense 10,500
Supplies expense 800
Rent expense 2,000
Depreciation expense 200
Interest expense 333
Bad debt expense 500
Totals 181,033 $ 181,033 $
This is the Adjusted
Trial Balance for
Dress Right after all
adjusting entries have
been recorded and
posted.
Dress Right will use
these balances to
prepare the financial
statements.
2-27
Dress Right Closing Entries
Sales revenue 38,500
Rent revenue 250
Income Summary 38,750

Income Summary 36,333
Cost of goods sold 22,000
Salaries expense 10,500
Supplies expense 800
Rent expense 2,000
Depreciation expense 200
Interest expense 333
Bad debt expense 500

Income Summary 2,417
Retained Earnings 2,417
Slide 28
2-28
Post-Closing Trial Balance
Lists permanent
accounts and their
balances.
Total debits equal
total credits.
DRESS RIGHT CLOTHING CORPORATION
Post-Closing Trial Balance
July 31, 2009
Account Title Debits Credits
Cash 68,500 $
Accounts receivable 2,000
Allowance for uncollectible accounts 500 $
Supplies 1,200
Prepaid rent 22,000
Inventory 38,000
Furniture and fixtures 12,000
Accumulated depr.-furniture & fixtures 200
Accounts payable 35,000
Note payable 40,000
Unearned rent revenue 750
Salaries payable 5,500
Interest payable 333
Common stock 60,000
Retained earnings 1,417
Totals 143,700 $ 143,700 $