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Larry M
...
com

Basics of Accounting & Information Processing: The Accounting Cycle
1st edition
© 2010 Larry M
...
Skousen &
bookboon
...
All material in this publication is copyrighted, and the exclusive
property of Larry M
...

ISBN 978-87-7681-583-7

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1

Accounting Defined

9

1
...
3

Managerial Accounting

10

1
...
5

Inherent Limitations

11

2 
The Accounting Profession and Careers

12

2
...
1 Assets

13

3
...
3

Owners’ Equity

13

3
...
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Basics of Accounting &
Information Processing

Contents

4 
How Transactions Impact the Accounting Equation

15

4
...
2

Edelweiss Buys Equipment With Loan Proceeds

16

4
...
4

Edelweiss Pays Expenses With Cash

17

4
...
6

Distinguishing Between Revenue and Income

19

5

The Core Financial Statements

20

5
...
2

Income Statement

21

5
...
4

Balance Sheet

23

5
...
6 Articulation
5
...


Unlocking the Mystery of Articulation

360°
thinking


...


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© Deloitte & Touche LLP and affiliated entities
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deloitte
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© Deloitte & Touche LLP and affiliated entities
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deloitte
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© Deloitte & Touche LLP and affiliated entities
...
1 Accounts

28

6
...
3

The Fallacy of “+/-” Nomenclature

30

6
...
5

Assets/Expanses Dividends

31

6
...
7

Analysis of Transactions and Events

32

6
...
9

A Common Misunderstanding About Credits

33

7

The Journal

34

7
...
2

Special Journals

35

7
...
4

But, What are the Account Balances?

37

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Basics of Accounting &
Information Processing

Contents

8

38

The General Ledger

8
...
2

To Review

42

9

The Trial Balance

43

9
...
2

Financial Statements From the Trial Balance

44

10 
Computerized Processing Systems

45

10
...
1

Comprehensive T-Accounting Illustration

48

11
...
3

Control and Subsidiary Accounts

51

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• The accounting profession and accounting careers
...

• How transactions impact the fundamental accounting equation
...


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Basics of Accounting &
Information Processing

Accounting Information

1 Accounting Information
You likely have a general concept of what accountants do
...
But, you likely do not realize the complexity of accomplishing this task
...
The best analogy is to say that you probably know what a heart surgeon does, but
you no doubt appreciate that considerable knowledge and skill is needed to successfully treat a patient
...
In this
chapter, you will begin your study of accounting by looking at the overall structure of accounting and
the basic anatomy of reporting
...
It only comes with determination
and hard work
...

Knowledge of accounting is very valuable to business success
...


1
...

The economic unit is generally considered to be a separate enterprise
...
These include business managers, owners,
creditors, governmental units, financial analysts, and even employees
...
Business
managers need accounting information to make sound leadership decisions
...
g
...

Creditors are always concerned about the entity’s ability to repay its obligations
...
Analysts use accounting data to form their opinions on which they base
their investment recommendations
...
Accounting
information about specific entities helps satisfy the needs of all these interested parties
...
Financial accounting is concerned with external reporting of information
to parties outside the firm
...
You may have some trouble seeing why a distinction is needed;
after all aren’t we just reporting financial facts? Let’s look closer at the distinctions
...
com

Basics of Accounting &
Information Processing

1
...
Their ability to understand and
have confidence in reports is directly dependent upon standardization of the principles and practices that
are used to prepare the reports
...
As a result, there are well organized processes to bring
consistency and structure to financial reporting
...
With the increase in global trade, the International Accounting
Standards Board (IASB) has been steadily gaining prominence as a global accounting rule setter
...
This means they are not
prepared especially for owners, or creditors, or any other particular user group
...
As such, attempts are made to keep them free from bias (neutral)
...
3

Managerial Accounting

In sharp contrast to financial accounting, managerial accounting information is intended to serve the
specific needs of management
...
As such, they may desire specialized reports, budgets, product costing data, and
other details that are generally not reported on an external basis
...
For instance, GAAP
may require that certain research costs be deducted immediately in computing a business’s externally
reported income; on the other hand, management may see these costs as a long-term investment and
stipulate that internal decision making be based upon income numbers that exclude such costs
...
Hopefully, such internal reporting is being done logically and rationally, but it need
not follow any particular set of guidelines
...
4

A Quality Information System

Both financial accounting and managerial accounting depend upon a strong information system to
reliably capture and summarize business transaction data
...
The era of the “green eyeshaded” accountant has been relegated to the annals of history
...


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5

Accounting Information

Inherent Limitations

Accounting data is not absolute or concrete
...
g
...
About the only way around the problem of utilizing estimation in accounting is to wait until all
facts are known with certainty before issuing any reports
...
Thus, in order to timely present information,
it is considered to be far better to embrace reasonable estimations in the normal preparation of ongoing
financial reports
...
As such, many transactions and events are reported based upon the historical cost principle
(in contrast to fair value)
...
For example, land is initially
recorded in the accounting records at its purchase price
...
While this enhances the “reliability” of reported data, it can
also pose a limitation on its “relevance
...
ie
...
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Length: 1O MONTHS
Av
...
Obviously, there
are many specialty areas
...
To engage in the practice
of public accounting usually requires one to be licensed as a CPA (Certified Public Accountant)
...
Tax services relate to the providing of help in the preparation and filing of tax returns
and the rendering of advice on the tax consequences of alternative actions
...
Many accountants are privately employed directly by small and large businesses
(i
...
, “industry accounting”) and not-for-profit agencies (such as hospitals, universities, and charitable
groups)
...
They may focus on internal auditing, which involves looking at controls and
procedures in use by their employers
...
They may
serve as in house tax accountants, financial managers, or countless other occupations
...
You would expect to find many accountants at the Internal Revenue Service, General
Accounting Office, Securities and Exchange Commission (“SEC” – the USA governmental agency charged
with regulating accounting and reporting by companies whose shares of stock are bought and sold in
public markets), and even the Federal Bureau of Investigation
...
1

Accounting and Professional Ethics

Because investors and creditors place great reliance on financial statements in making their investment
and credit decisions, it is imperative that the financial reporting process be truthful and dependable
...
To help
insure integrity in the reporting process, the profession has adopted a code of ethics to which its licensed
members must adhere
...
If you are preparing to enter the accounting profession, you should do so with
the intention of behaving with honor and integrity
...
You have every
right to expect those accountants to behave in a completely trustworthy and ethical fashion
...


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Luca
Pacioli, a Renaissance era monk, developed a method for tracking the success or failure of trading
ventures
...
The nucleus of that system is
the notion that a business entity can be described as a collection of assets and the corresponding claims
against those assets
...
e
...
This gives rise to the fundamental accounting equation:
Assets = Liabilities + Owners’ Equity

3
...
Assets are presumed to entail probable future
economic benefits to the owner
...
2 Liabilities
Liabilities are amounts owed to others relating to loans, extensions of credit, and other obligations arising
in the course of business
...
3

Owners’ Equity

Owners’ equity is the owner’s “interest” in the business
...
Who are the “owners?” The answer to this
question depends on the legal form of the entity; examples of entity types include sole proprietorships,
partnerships, and corporations
...
Conversely, a partnership is a business owned
by more than one person, with its equity consisting of a separate capital account for each partner
...
These shares are easily transferable, with the current holder(s)
of the stock being the owners
...
e
...

Earnings give rise to increases in “retained earnings,” while dividends (and losses) cause decreases
...
com

Basics of Accounting &
Information Processing

3
...
It is central
to understanding a key financial statement known as the balance sheet (sometimes called the statement
of financial position)
...
Creditors are owed $175,000, leaving $720,000 of stockholders’ equity
...
e
...

Does the stockholders’ equity total mean the business is worth $720,000? No! Why not? Because many
assets are not reported at current value
...
Similarly, the business may have unrecorded resources to its credit,
such as a trade secret or a brand name that allows it to earn extraordinary profits
...
This observation tells us that accounting statements
are important in investment and credit decisions, but they are not the sole source of information for
making investment and credit decisions
...
com

Basics of Accounting &
Information Processing

How Transactions Impact the Accounting Equation

4 
How Transactions Impact the
Accounting Equation
The preceding balance sheet for Edelweiss was static
...
But, each passing transaction or event brings about a change in the overall
financial condition
...
So, how does this happen? To reveal the
answer to this question, let’s look at four specific transactions for Edelweiss Corporation
...


4
...
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Basics of Accounting &
Information Processing

How Transactions Impact the Accounting Equation

EDELWEISS CORPORATION
Balance Sheet
December 31, 20X3
(before indicated transaction)
Assets
Cash
Accounts receivable
Inventories
Land
Building
Equipment
Other assets
Total assets

*
Liabilities

Accounts payable
Loans payable
p y
Total liabilities
Stockholders’ equity
Capital stock
Retained earnings
Total stockholders’ equity
Total liabilities and equity

EDELWEISS CORPORATION
Balance Sheet
December 31, 20X3
(after indicated transaction)
$ 25,000
50,000
35,000
125,000
400,000
250,000
10,000
$895,000

$ 50,000
125,000
$120,000
600,000

$175,000

720,000
,
$895,000

+ $10,000
- $10,000

+ $0

+ $0

+ $0

Assets
Cash
Accounts receivable
Inventories
Land
Building
Equipment
Other assets
Total assets
Liabilities
Accounts payable
Loans payable
p y
Total liabilities
Stockholders’ equity
Capital stock
Retained earnings
Total stockholders’ equity
Total liabilities and equity

$ 35,000
,
,
40,000
35,000
125,000
400,000
250,000
10,000
$895,000
$ 50,000
125,000

$175,000

$120,000
600,000

720,000
,
$895,000

The illustration plainly shows that cash (an asset) increased from $25,000 to $35,000, and accounts
receivable (an asset) decreased from $50,000 to $40,000
...
Thus, assets still equal liabilities plus equity
...
2

Edelweiss Buys Equipment With Loan Proceeds

If Edelweiss Corporation purchased $30,000 of equipment, agreeing to pay for it later (i
...
taking out a
loan), then the balance sheet would be further revised as follows
...
com

$ 35,000
40,000
35,000
125,000
400,000
,
280,000
10,000
$925,000
$ 50,000
155,000
$120,000
600,000

$205,000

720,000
,
$925,000

Basics of Accounting &
Information Processing

How Transactions Impact the Accounting Equation

This illustration shows that equipment (an asset) increased from $250,000 to $280,000, and loans payable
(a liability) increased from $125,000 to $155,000
...


4
...
When Edelweiss Corporation earned $5,000 (which they will collect later) by providing a
service to a customer, it can be said that they generated revenue of $5,000
...
Revenue will bring about an increase
to income, and income is added to retained earnings
...

And, guess what: assets still equal liabilities plus equity
...
4

Edelweiss Pays Expenses With Cash

It would be nice if you could run a business without incurring any expenses
...
Expenses are the outflows and obligations that arise from producing goods and services
...
The lower set of balance sheets on the following page shows
this impact
...
5

Generalizing About the Impact of Transactions

There are countless types of transactions that can occur, and each and every transaction can be described
in terms of its impact on assets, liabilities, and equity
...


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$ 32,000
,
45,000
35,000
125,000
400,000
280,000
10,000
$927,000
$ 50,000
155,000
$120,000
602,000

$205,000

722,000
,
$927,000

Basics of Accounting &
Information Processing

4
...

Words may be treated as synonymous, when in fact they are not
...
” Each term has a very precise meaning, and you should accustom yourself to the correct
usage
...
Conversely, expenses can generally be regarded as costs of doing business
...

Income is the “bottom line” amount that results after deducting the expenses from revenue
...
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Basics of Accounting &
Information Processing

The Core Financial Statements

5 The Core Financial Statements
Your future will undoubtedly be marked by numerous decisions about investing money in the capital
stock of some corporation
...
” Stocks and bonds are two of
the most prevalent financial instruments of the modern global economy
...
Public
companies are those with securities that are readily available for purchase/sale through organized stock
markets
...
If you are contemplating an investment in a public or private entity, there
is certain information you will logically seek to guide your decision process
...

What are the corporate assets? Where does the company operate? What are the key products? How much
income is being generated? Does the company pay dividends? What is the corporate policy on ethics
and environmental responsibility?
Many such topics are noted within the illustrated “thought cloud
...
Other topics are of more general interest and cannot be communicated in strict
mathematical terms (noted in red)
...
com

Basics of Accounting &
Information Processing

The Core Financial Statements

Financial accounting seeks to directly report information for the topics noted in blue
...
But,
you would also need to gain additional information by reviewing corporate web sites (many have
separate sections devoted to their investors), filings with the securities regulators, financial journals
and magazines, and other such sources
...
These events are very valuable in allowing investors
and creditors to make informed decisions about the company, as well as providing a forum for direct
questioning of management
...
Be aware, however, that the company will likely not be able to respond in a
meaningful way
...

FD)
...


5
...
You have already
been introduced to the balance sheet
...
There are many rules that govern
the form and content of each financial statement
...
For instance, the earlier illustration for Edelweiss
was first presented as a “horizontal” layout of the balance sheet
...
Each approach, and others, is equally acceptable
...
2

Income Statement

A summary of an entity’s results of operation for a specified period of time is revealed in the income
statement, as it provides information about revenues generated and expenses incurred
...
The income statement can
be prepared using a single-step or a multiple-step approach, and might be further modified to include
a number of special disclosures relating to unique items
...
For now, take careful note that the income statement relates to activities of a
specified time period (e
...
, year, quarter, month), as is clearly noted in its title:

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3

$115,000

The Statement of Retained Earnings

The example balance sheets for Edelweiss revealed how retained earnings increased and decreased in
response to events that impacted income
...


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In essence, the statement is nothing more than a reconciliation or “bird’s-eye
view” of the bridge between the retained earnings amounts appearing on two successive balance sheets
...
The statement of stockholders’ equity portrays not only the changes in retained earnings, but
also changes in other equity accounts such as capital stock
...


5
...
The balance sheet is prepared
as of a specific date, whereas the income statement and statement of retained earnings cover a period
of time
...
Quartz’s balance sheet is as follows:

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5

$220,000
480,000

700,000
$900,000

Statement of Cash Flows

The statement of cash flows details the enterprise’s cash flows
...
It consists of three unique sections that
isolate the cash inflows and outflows attributable to (a) operating activities, (b) investing activities, and
(c) financing activities
...
This result occurs because some items hit income and cash flows in
different periods
...
That transaction increased income without a similar effect on cash
...


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...
Do not be concerned if you feel like you lack a complete comprehension at this
juncture
...


5
...
This means they mesh together in a self-balancing fashion
...
This final tie-in causes the balance sheet to balance
...

QUARTZ CORPORATION
Income Statement
For the Year Ending December 31, 20X9
Revenues

Retained earnings - January 1, 20X9

Services to customers
Interest income
Total revenues

$515,000
$765,000

Expenses

*

Salaries
Rent
Other operating expenses
Total expenses
Net income

$400,000
115,000

Plus: Net income

$750,000
15,000

QUARTZ CORPORATION
Balance Sheet
December 31, 20X9

QUARTZ CORPORATION
Statement of Retained Earnings
For the Year Ending December 31, 20X9

Less: Dividends

35,000

Retained earnings - Dece
December 31, 20X9

$480,000

$235,000
115,000
300,000

Assets
Cash
Accounts receivable
Land
Other assets

$192,000
248,000
450,000
10,000
$900,000

Total assets

abili
Liabilities
650,000

s payable
Salaries pay
ayabl
Accounts payable
s
Total liabilities

$115,000

$ 34,000
166,000

$200,000

Stockholders’ equity
Capital stock
Retained earnings
Total stockholders’ equity
Total liabilities and equity

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7

The Core Financial Statements

Unlocking the Mystery of Articulation

It seems almost magical that the final tie-in of retained earnings will exactly cause the balance sheet to
balance
...


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• The journal
...

• The trial balance
...

• T-Accounts
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Basics of Accounting &
Information Processing

Accounts, Debits, and Credits

6 Accounts, Debits, and Credits
The previous chapter showed how transactions caused financial statement amounts to change
...
was used to develop the illustrations
...

As transactions occurred, they would be called in to the department and the chalk board would be
updated
...
Even if the business could manage to figure out what its financial
statements were supposed to contain, it probably could not systematically describe the transactions that
produced those results
...

It is imperative that a business develop a reliable accounting system to capture and summarize its
voluminous transaction data
...
In general terms, an accounting system
is a system where transactions and events are reliably processed and summarized into useful financial
statements and reports
...
This chapter will
provide insight into these tools and the general structure of a typical accounting system
...
1 Accounts
The records that are kept for the individual asset, liability, equity, revenue, expense, and dividend
components are known as accounts
...
All accounts,
collectively, are said to comprise a firm’s general ledger
...

Thus, you could thumb through the notebook to see the “ins” and “outs” of every account, as well as
existing balances
...
com

Basics of Accounting &
Information Processing

Accounts, Debits, and Credits

ACCOUNT: Cash
Date

Description

Increase

Decrease

Balance

$

50,000

Jan
...
2, 20X3

Collected receivable

Jan
...
5, 20X3

Paid rent

Jan
...
8, 20X3

Cash sale

Jan
...
10, 20X3

Paid tax

1,000

56,000

Jan
...
By examining the account, you
can see the various transactions that caused increases and decreases to the $50,000 beginning of month
cash balance
...
If you were to prepare a balance sheet on January 12, you would include cash for the
indicated amount (and, so forth for each of the other accounts comprising the entire financial statements)
...
2

Debits and Credits

Without a doubt, you have heard or seen a reference to debits and credits; perhaps you have had someone
“credit” your account or maybe you have used a “debit” card to buy something
...
In other words, instead of saying that cash is “increased”
or “decreased,” we say that cash is “debited” or “credited
...
Why add
this complexity – why not just use plus and minus like in the previous chapter? You will soon discover
that there is an ingenious answer to this question!
Understanding the answer to this question begins by taking note of two very important observations:
(1) every transaction can be described in debit/credit form
and
(2) for every transaction, debits = credits

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...
3

Accounts, Debits, and Credits

The Fallacy of “+/-” Nomenclature

The second observation above would not be true for an increase/decrease system
...
On the
other hand, paying an account payable causes a decrease in cash and a decrease in accounts payable (a
“-/-” outcome)
...
In the previous chapter, the “+/-”
nomenclature was used for the various illustrations
...
Therefore,
it is easy to get something wrong and be completely unaware that something has gone amiss
...
If one attempts to describe the effects of a
transaction in debit/credit form, it will be readily apparent that something is wrong when debits do not
equal credits
...



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Basics of Accounting &
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6
...
However, the debit/credit rules are
inherently logical (the logic is discussed at linked material in the online version of the text)
...
So, you are well advised to memorize the “debit/ credit”
rules now
...


6
...
Debits increase
these accounts and credits decrease these accounts
...
To
aid your recall, you might rely on this slightly off-color mnemonic: D-E-A-D = debits increase expenses,
assets, and dividends
...
6 Liabilities/Revenues/Equity
These three types of accounts follow rules that are the opposite of those just described
...
These accounts normally carry a credit
balance
...
com

Basics of Accounting &
Information Processing

6
...
In essence,
accountants have their own unique shorthand to portray the financial statement consequence for every
recordable event
...
Then, debits
and credits are applied to the accounts, utilizing the rules set forth in the preceding paragraphs
...
A cash disbursement will be supported by the issuance of a check
...
Receipts may be retained to show the reason for a particular
expenditure
...
A tax statement may document the amount paid
for taxes
...
A bank deposit slip may show collections of customer
receivables
...

Source documents usually serve as the trigger for initiating the recording of a transaction
...

Source documents should be retained (perhaps in electronic form) as an important part of the records
supporting the various debits and credits that are entered into the accounting records
...
It would not
do for transactions to slip through the cracks and go unrecorded
...
For example,
you likely maintain a checkbook where you record your cash disbursements
...
A business must engage
in similar activities to make sure that all transactions and events are recorded correctly
...


6
...

Earlier, an illustration for a Cash account was presented
...
Now, you know that accounts are more likely maintained by using the
debit/credit system
...
A typical Cash account would
look similar to this illustration:

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...
1, 20X3
Jan
...
3, 20X3

Cash sale

Jan
...
7, 20X3

Paid salary

Jan
...
8, 20X3

Paid bills

2,000

57,000

Jan
...
12, 20X3

6
...
However, a quick review
of the debit/credit rules reveals that this is not true
...
” This wording is often used when
you return goods purchased on credit; but, carefully consider that your account (with the store) is on
the store’s books as an asset account (specifically, an account receivable from you)
...
”
On the other hand, some may assume that a credit always increases an account
...
Assume that Matthew made a deposit to his account
at Monalo Bank
...
This liability would be credited each time Matthew adds to his account
...


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But,
learning can be made quite simple by relating new concepts to preexisting notions that are already well
understood
...
But, you knew that
...
However, rather than including a detailed narrative description of a company’s
transactions and events, the journal lists the items by a “form of shorthand notation
...
Remember what was
said at the beginning of the chapter: “The system must be sufficient to fuel the preparation of the financial
statements, and be capable of maintaining retrievable documentation for each and every transaction
...
” The journal satisfies the need for
this logging process!

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This means that source documents are
reviewed and interpreted as to the accounts involved
...
As such the general journal becomes a log book of the recordable transactions and
events
...
That objective is fulfilled
by subsequent steps
...


7
...
Specifically it shows the
journalizing process for Xao’s transactions
...
You will also note that each transaction is followed by a brief narrative description;
this is a good practice to provide further documentation
...
Finally, notice that a transaction may involve
more than two accounts (as in the January 28 transaction below); the corresponding journal entry for
these complex transactions is called a “compound” entry
...
An actual journal for a
business might consume hundreds and thousands of pages to document its many transactions
...


7
...
All transactions and events can be
recorded in the general journal
...
” Special
journals are totally optional; they are typically employed when there are many redundant transactions
...
These special journals do not replace the general journal
...
The transaction
descriptions associated with each transaction found in the general journal are not normally needed in
a special journal, given that each transaction is redundant in nature
...
But, for learning purposes, let’s just rely
on the general journal to accomplish our goals
...
com

Basics of Accounting &
Information Processing

The Journal

GENERAL JOURNAL
Date
1-1-X3

Page 1
Accounts

Debits

Cash

Credits

25,000
Capital Stock

25,000

Issued stock to shareholders,
in exchange for cash

1-4-X3

Advertising Expense

2,000
2,000

Cash
Paid advertising expense for initial advertising
programs

1-8-X3

Cash

4,000
Service Revenue

4,000

Provided services to customers for cash

GENERAL JOURNAL
Date
1-15-X3

Page 2
Accounts

Debits

Utilities Expense

Credits

1,000

Accounts Payable

1,000

Received bill for utility costs incurred

1-17-X3

Accounts Receivable

8,000
8,000

Service Revenue
Provided services to customers on account

1-18-X3

Accounts Payable

500

Cash

500

Paid half of the amount due on the utility bill
received on January 15

1-25-X3

Cash

4,800
Accounts Receivable

4,800

Received 60% of the amount due on the
receivable that was established on January 17

1-28-X3

Land

15,000
Cash

5,000

Notes Payable

10,000

Purchased land by giving $5,000 cash, and
promising to pay the remainder in 90 days

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3

The Journal

Page Numbering

Second, notice that the illustrated journal consisted of two pages (labeled page 1 and page 2)
...


7
...
For instance, how much cash does Xao
Corporation have at the end of January? One could go through the journal and net the debits and credits
to Cash ($25,000 – $2,000 + $4,000 – $500 + $4,800 – $5,000 = $26,300)
...
It would become virtually impossible if the journal were hundreds of pages long
...
This is where the general ledger comes into play
...
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Basics of Accounting &
Information Processing

The General Ledger

8 The General Ledger
As you just saw, the general journal is, in essence, a notebook that contains page after page of detailed
accounting transactions
...
The ledger account for Xao would include the
Cash page as illustrated below:

ACCOUNT: Cash
Date

Description

Jan
...
1, 20X3

Journal page 1
Journal page 1

Jan
...
25, 20X3

Journal page 2

Jan
...
4, 20X3

Credit

Balance forward

Jan
...


8
...
We are going to
determine the balance of each specific account by posting
...


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Following is an illustration of the posting
process
...
A similar process would
occur for each of the other accounts
...
This reduces the amount of
detailed information that must be recorded in the ledger, and provides an audit trail back to the original
transaction in the journal
...
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Basics of Accounting &
Information Processing

The General Ledger

ACCOUNT: Cash
Date

Description

Jan
...
1, 20X3

Journal page 1

Jan
...
8, 20X3

Journal page 1

Jan
...
28, 20X3

Credit

Journal page 2

Jan
...
1, 20X3
Jan
...
25, 20X3

Debit

Journal page 2

Credit

Balance forward

Balance
$

-

$ 8,000

8,000
$

4,800

3,200

ACCOUNT: Land
Date

Description

Jan
...
28, 20X3

Debit

Journal page 2

Credit

Balance forward

Balance
$

-

$ 15,000

15,000

ACCOUNT: Accounts Payable
Date

Description

Jan
...
15, 20X3

Journal page 2

Jan
...
1, 20X3
Jan
...
1, 20X3
Jan
...
1, 20X3

Balance forward

$

Jan
...
17, 20X3

Journal page 2

8,000

12,000

ACCOUNT: Advertising Expense
Date

Description

Jan
...
4, 20X3

Debit

Journal page 1

Credit

Balance forward

Balance
$

-

$ 2,000

2,000

ACCOUNT: Utilities Expense
Date

Description

Jan
...
15, 20X3

Debit

Balance forward
Journal page 2

Credit

Balance
$

$ 1,000

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...

Without these marks (in a manual system), it would be very easy to fail to post a transaction, or even
post the same transaction twice
...
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Basics of Accounting &
Information Processing

8
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Basics of Accounting &
Information Processing

The Trial Balance

9 The Trial Balance
After all transactions have been posted from the journal to the ledger, it is a good practice to prepare
a trial balance
...
The trial balance is not a formal financial statement, but rather a self-check to
determine that debits equal credits
...

XAO CORPORATION
Trial Balance
January 31, 20X3
Debits
Cash
Accounts receivable
Land
Accounts payable
Notes payable
Capital stock
Service revenues
Advertising expense
Utilities expense

9
...
If the trial balance fails
to balance, an error has occurred and must be located
...
You should also be aware that a “balanced”
trial balance is no guarantee of correctness
...


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2

The Trial Balance

Financial Statements From the Trial Balance

In the next chapter you will learn about additional adjustments that may be needed to prepare a truly
correct and up-to-date set of financial statements
...
The basic process is to transfer
amounts from the general ledger to the trial balance, then into the financial statements:

*

In reviewing the following financial statements for Xao, notice that blue italics were used to draw attention
to the items taken directly from the trial balance above
...
These statements would appear as follows:
XAO CORPORATION
Income Statement
For the Year Ending January 31, 20X3
Revenues
Services to customers
Expenses
Advertising
Utilities

XAO CORPORATION
Balance Sheet
January 31, 20X3

$12,000
$2,000
1,000

Net income

Assets

3,000
$9,000

Liabilities
Accounts payable
Notes payable
Total liabilities

XAO CORPORATION
Statement of Retained Earnings
For the Year Ending January 31, 20X3
Retained earnings - January 1, 20X3
Plus: Net income

Capital stock
Retained earnings
Total stockholders’ equity
Total liabilities and equity

$9,000
-

Retained earnings - January 31, 20X3

$

500
10,000

$10,500

Stockholders’ equity

$ 9,000

Less: Dividends

$26,300
3,200
15,000
$44,500

Cash
Accounts receivable
Land
Total assets

$9,000

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...

Once the initial journal entry is prepared, the data are merely being manipulated to produce the ledger,
trial balance, and financial statements
...
In short, the only “analytics” relate
to the initial transaction recordation
...

Many companies produce accounting software
...

Some basic products for a small business may be purchased for under $100
...
Recently, some software
companies have even offered accounting systems maintained on their own network, with the customers
utilizing the internet to enter data and produce their reports
...
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1

Computerized Processing System

What do they Look Like

As you might expect, the look, feel, and function of software-based packages varies significantly
...
But, in general, accounting
software packages:
• Attempt to simplify and automate data entry (e
...
, a point-of-sale terminal may actually
become a data entry device so that sales are automatically “booked” into the accounting
system as they occur)
...

• Attempt to be “user-friendly” by providing data entry blanks that are easily understood in
relation to the underlying transactions
...

• Are built on data-base logic, allowing transaction data to be sorted and processed based on
any query structure (e
...
, produce an income statement for July, provide a listing of sales to
Customer Smith, etc
...

• Are capable of producing numerous specialized reports in addition to the key financial
statements
...
It should look quite familiar
...
) is totally automated
...
00

Accounts Payable

$1,000
...
00
Record entry #756

Credits

$1,000
...
com

Basics of Accounting &
Information Processing

Computerized Processing System

Despite each product’s own look and feel, the persons primarily responsible for the maintenance and
operation of the accounting function must still understand accounting basics such as those introduced
in this chapter: accounts, debits and credits, journal entries, etc
...
So, while it is safe to assume that you will probably be working in a
computerized accounting environment, it equally true to say that you should first come to understand
the basic processing described in this and subsequent chapters
...


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...
” Importantly, one would
not use t-accounts for actually maintaining the accounts of a business
...

T-accounts would quickly become unwieldy in an enlarged business setting
...
They are useful communication devices to discuss, illustrate,
and think about the impact of transactions
...
The “balance” is the amount by which debits exceed credits (or vice
versa)
...
Carefully
compare this t-account to the actual running balance ledger account which is also shown (notice that
the debits in black total to $33,800, the credits in red total to $7,500, and the excess of debits over credits
is $26,300 – which is the resulting account balance shown in blue)
...
1, 20X3

Balance forward

Jan
...
4, 20X3

Journal page 1

Jan
...
18, 20X3

Journal page 2

Jan
...
28, 20X3

Journal page 2

11
...
The debits/credits for each entry can be traced to
the corresponding accounts
...


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...
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$26,300
3,200
15,000

2,000
1,000
$47,500

Credits

$

500
10,000
25,000
12,000

$47,500

Basics of Accounting &
Information Processing

11
...
Individual accounts
are often given a specific reference number
...
For example, all assets may begin with “1” (e
...
, 101 for
Cash, 102 for Accounts Receivable, etc
...
A simple chart of accounts for
Xao Corporation might appear as follows:
No
...
102: Accounts Receivable
No
...
201: Accounts Payable
No
...
301: Capital Stock
No
...
501: Advertising Expense
No
...
Many computerized systems allow rapid entry
of accounts by reference number rather than by entering a full account description
...
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Basics of Accounting &
Information Processing

11
...
For instance, a company may have
total accounts receivable of $19,000, consisting of amounts due from Compton, Fisher, and Moore
...
Therefore, sub-accounts are used
...
1, 20X5
Jan
...
1, 20X5

Journal page 1/Compton

Credit

Balance forward

Jan
...
12, 20X5

Journal page 2/Sunderman

Jan
...
12, 20X5

Balance
alance
$ 30,000

$ 6,000

Journal page 1/Fisher

Jan
...
1, 20X5
Debit

Credit

ACCOUNT: Fisher
her

ACCOUNTS RECEIVABLE: CONTROL LEDGER

Date

Debit

Balance forward

17,000

1
Jan
...
24, 20X5

Journal page 2

19,000

Description

Debit

Credit

Balance
$ 8,000

$ 8,000

-

ACCOUNT: Moore
Date

Description

Jan
...
30, 20X5

Journal page 2

Debit

Credit

Balance forward
ward

Balance
$ 7,000

$ 2,000

ENDING BALANCES MUST AGREE WITH CONTROL ACCOUNT
BEGINNING BALANCES MUST AGREE WITH CONTROL ACCOUNT

9,000

$ 19
...
000

The total receivables are the sum of all the individual receivable amounts
...

The company’s chart of accounts will likely be based upon some convention such that each subsidiary
account is a sequence number within the broader chart of accounts
...
001, 102
...
003, etc
...
Here, computers can be
particularly helpful in maintaining the detailed and aggregated data in perfect harmony
...
com



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