Stice | Stice | Skousen Intermediate Accounting,17E A Review of the Accounting Cycle PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University © 2010 Cengage Learning Recording Phase Business documents are analyzed Transactions are recorded Transactions are posted 2-2 Reporting Phase A trial balance of the accounts in the general ledger is prepared Adjusting entries are recorded Financial statements are prepared Nominal accounts are closed A post-closing trial balance may be prepared 2-3 Double-Entry Accounting • An old and universally accepted system for recording accounting data • Each transaction/ business event is recorded to maintain the equality of the basic accounting equation Assets = Liabilities + Owners’ Equity 2-4 Double-Entry Accounting • A debit is an entry on the left side of an account • A credit is an entry on the right side of an account • Assets, expenses, and dividends are increased by debits and decreased by credits • Liabilities, capital stock, retained earnings, and revenues are increased by credits and decreased by debits 2-5 3-Step Journal Entry Process Identify the accounts involved with an event or transaction Determine whether each account increased or decreased Determine the amount by which each account was affected 2-6 Summarizing Assets are increased by debits and decreased by credits Liability and owners’ equity accounts are increased by credits and decreased by debits Owners’ equity for a corporation includes capital stock accounts and the retained earnings account Revenues, expenses, and dividends relate to owners’ equity through the retained earnings account (continues) 2-7 Summarizing Expenses and dividends are increased by debits and decreased by credits Revenues are increased by credits and decreased by debits The difference between total revenues and total expenses for a period is net income (loss), which increases (decreases) owners’ equity through the retained earnings account 2-8 Journalizing Transactions • A special journal is used to record a particular type of frequently recurring transaction • sales, purchases, cash disbursements, cash receipts • The general journal is used to record all transactions for which a special journal is not maintained 2-9 Posting to the Ledger Accounts • An account is used to summarize the effects of transactions on each element of the expanded accounting equation • A ledger is a collection of accounts maintained by a business • The transfer of information from the journal to the appropriate account in the ledger is referred to as posting 2-10 Adjusting Entries Summary • Adjusting entries not involve cash • Adjusting entries always incorporate a balance sheet account and an income statement account 2-34 Preparing Financial Statements Identify all revenues and expenses— these account balances are used to prepare the income statement Compute the net income Compute the ending retained earnings balance Prepare a balance sheet using the balance sheet accounts from the trial balance and the modified retained earnings balance (from step 3) 2-35 Using a Spreadsheet An optional step in the accounting process is to use a spreadsheet (also called a work sheet) to facilitate the preparation of adjusting entries and financial statements The availability of spreadsheet software makes the preparation of a spreadsheet quite easy A spreadsheet for Rosi, Inc, is shown next 2-36 (continues) 2-37 2-38 Closing the Nominal Accounts • Real accounts Not closed to a zero balance at the end of the accounting period Carried forward to the next period • Nominal (or temporary) accounts Closed to a zero balance at the end of each accounting period All income statement accounts and the dividend account • Closing entries reduce all nominal accounts to a zero balance 2-39 The Closing Process Revenues xx Retained Earnings Bal xxx Beg Bal xxx Revenues Since Since the the revenue revenue account account is is aa nominal nominal account, account, itit is is closed closed at at the the end end of of the the period period to to Retained Retained Earnings Earnings 2-40 The Closing Process Retained Earnings Expenses Beg Bal xxx Revenues Expenses Bal xxx xx Each Each expense expense account account is is credited credited in in order order to to close close the the account account at at the the end end of of the the period period 2-41 The Closing Process Retained Earnings The The dividends dividends account, account, which which is is also also nominal, nominal, is is credited credited to to close close out out the the balance balance Expenses Dividends Beg Bal xxx Revenues Dividends Bal xxx x x 2-42 The Closing Process Retained Earnings Retained RetainedEarnings Earnings isisaareal realaccount account and andalways alwayscarries carries aabalance balance Net NetIncome Incomefor forthe the period periodisisdetermined determined by bythese thesetwo twoitems items Expenses Dividends Beg Bal xxx Revenues Dividends Dividendsreduce reduce Retained RetainedEarnings Earnings 2-43 Post-Closing Trial Balance • Provides a listing of all real account balances at the end of the closing process • The post-closing trial balance is prepared to verify the equality of debits and credits for all real accounts 2-44 Accrual Accounting • Accrual accounting recognizes revenues as they are earned, not necessarily when cash is received • Expenses are recognized as they are incurred, not necessarily when cash is paid • Provides a better basis for financial reporting, according to the FASB 2-45 Cash-Basis Accounting • Cash-basis accounting is focused on cash receipts and cash disbursements • Typically used by service businesses, such as CPAs, dentists, and engineers • AICPA holds that it is appropriate for small service companies 2-46 Computers and Accounting • Many steps of the accounting cycle are performed using computers • Typical computerized functions include generating reports and computational analysis • The computer will never replace a good accountant! 2-47 Computers and Accounting • A recent development in the use of computers in financial reporting is the spread of XBRI Stands for eXtensible Business Reporting Language Is a method of embedding computer-readable tags in financial report documents Allows a company to download its financial statements into spreadsheets where they can be compared to the financial statements of other companies that have also been downloaded 2-48 ... Double-Entry Accounting • An old and universally accepted system for recording accounting data • Each transaction/ business event is recorded to maintain the equality of the basic accounting equation... equality of the basic accounting equation Assets = Liabilities + Owners’ Equity 2-4 Double-Entry Accounting • A debit is an entry on the left side of an account • A credit is an entry on the right... Accounts • An account is used to summarize the effects of transactions on each element of the expanded accounting equation • A ledger is a collection of accounts maintained by a business • The transfer