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Accounting process
The purpose of this lesson is to examine how the various activities of the organization’s credit operations
are recorded
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Voucher preparation and journal entries are explained for both Balance Sheet accounts
(Assets, Liabilities and Equity) and Income Statement accounts (Revenue and Expenses)
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You will develop a good understanding of how to record transactions and what the terms “debit” and
“credit” refer to in accounting terms
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Topics include:
Double-Entry Accounting
Voucher Preparation
Journal Entries
Recording Assets, Liabilities and Equity Transactions
Recording Revenues and Expenses
Cash Account and Bank Reconciliation
Jounal: In accounting and bookkeeping, a journal is a record of financial transactions in order
by date
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The ledger: provides a complete record of financial transactions over the life of the company
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Trial Balance'
A trial balance is a bookkeeping worksheet in which the balances of all ledgers are
compiled into debit and credit columns
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The general purpose of producing a trial
balance is to ensure the entries in a company's bookkeeping system are mathematically
correct
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The series of steps begin when a
transaction occurs and end with its inclusion in the financial statements
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Next Up
1
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General Ledger
3
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Economic Cycle
Measuring business income
the complex ideas are clearly expressed and the arguments well stated
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Most
difficult problems in the social sciences, the authors note, have no definitive solutions, but simply
outcomes
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"--The Journal of
Business "Professors Edwards and Bell give us a most satisfying study of different concepts of business
income
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As they themselves
suggest, time may show that their programme needs amendment; but they state the problem clearly and
provide an excellent starting point
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Beyond doubt their book is the most wise and original contribution to accounting theory since Professor
Bonbright wrote 'The Valuation of Property' a quarter of a century ago
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The process that
results in reasonable dollar amounts being reported in financial statements is the
adjusting process
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Once the general ledger
debits equal the general ledger credits, the financial statements can be prepared
from the trial balance data
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Net income from the income statement will tie to the statement of retained
earnings
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The balance sheet will balance: assets will
equal liabilities plus stockholders' equity
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Although the debits equals credits rule guarantees that the
accounting equation will always be in balance, it does not guarantee that the
information in the accounting system is reasonable
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If the review process suggests account
balances are unreasonable, those balances should be changed to more reasonable
balances through the preparation of adjusting journal entries
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Below is the Guitar Lesson Corporation's December 31 trial balance prepared from
the company's general ledger
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" This means the data in the trial balance have not been reviewed for
reasonableness, but resulted from normal, everyday transactions similar to those
presented in previous chapters
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No
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Adjusting Entries
In this chapter you will see how accounting systems assure that the data reported in
financial statements reflect actual business operations and resources
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Steps in the accounting process (so far): the material in the first three chapters
presented the following four steps in the accounting process
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Organize data by using a chart of accounts and a general ledger
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Analyze transactions and prepare journal entries
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Post journal entries to the general ledger
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Prepare a trial balance to verify that the total dollar amount of debits equals
the total dollar amount of credits in the general ledger
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The resulting financial statements will tie together
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The ending retained earnings balance from the statement of retained
earnings will tie to the balance sheet
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Needed: a process to guarantee that the dollar amounts reported on the financial
statements are reasonable
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The process that guarantees that
accounting information is reasonable requires that each account's balance be reviewed
prior to the preparation of financial statements
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This process is called the
adjusting process
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Note that the trial balance heading includes the word
"unadjusted
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Guitar Lessons Corporation
Unadjusted Trial Balance
December 31
Acct
...
Account
Debits
111
Cash
$9,750
112
Notes Receivable
3,000
113
Accounts Receivable
1,200
115
Supplies
600
119
Prepaid Insurance
1,000
211
Accounts Payable
213
Unearned Fees Revenue
311
Common Stock
313
Retained Earnings
315
Dividends
150
411
Fees Revenue
517
Wages Expense
900
Totals
$16,600
Based on the above trial balance:
Net income = $2,300 ($3,200 fees revenue - $900 wages expense)
Credits
$1,350
800
7,000
4,250
3,200
$16,600
Retained Earnings = $6,400 ($4,250 retained earnings on December 1 + $2,300 net
income - 150 dividends)
Assets = $15,550 ( cash + notes receivable + accounts receivable + supplies + prepaid
insurance)
Liabilities = $2,150 (accounts payable + unearned fees revenue)
Stockholders' Equity = $13,400 ($7,000 common stock + $6,400 retained earnings)
Notice that since the Guitar Lessons Corporation's trial balance total debits equals its
total credits, the accounting equation balances: assets ($15,550) = liabilities ($2,150)
+ stockholders' equity ($13,400)
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Transactions
Financial transactions start the process
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The journal is also known as the “book of
original entry” and is the first place a transaction is listed
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Posting
The transactions are posted to the account that it impacts
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If that’s the case, you look for errors and make corrections
called adjustments, which are tracked on a worksheet
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After you
make and record adjustments, you take another trial balance to be sure the
accounts are in balance
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Adjusting journal entries
You post any corrections needed to the affected accounts once your trial balance
shows the accounts will be balanced once the adjustments needed are made to the
accounts
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8
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Definition - What are Financial Statements?
Financial Statements represent a formal record of the financial activities of an entity
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Financial Statements
reflect the financial effects of business transactions and events on the entity
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Statement of Financial Position
Statement of Financial Position, also known as the Balance Sheet, presents the financial position
of an entity at a given date
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g
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g
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This represents the amount of capital that remains
in the business after its assets are used to pay off its outstanding liabilities
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View detailed explanation and Example of Statement of Financial Position
2
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Income Statement is composed
of the following two elements:
Income: What the business has earned over a period (e
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sales revenue, dividend income, etc)
Expense: The cost incurred by the business over a period (e
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salaries and wages, depreciation,
rental charges, etc)
Net profit or loss is arrived by deducting expenses from income
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Cash Flow Statement
Cash Flow Statement, presents the movement in cash and bank balances over a period
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Investing Activities: Represents cash flow from the purchase and sale of assets other than
inventories (e
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purchase of a factory plant)
Financing Activities: Represents cash flow generated or spent on raising and repaying share
capital and debt together with the payments of interest and dividends
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Statement of Changes in Equity
Statement of Changes in Equity, also known as the Statement of Retained Earnings, details the
movement in owners' equity over a period
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g
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com/financial/statements/types
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