2. The Accounting Cycle 1. Analyze business transactions 2. Journalize the transactions 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Journalize and post closing entries 9. Prepare a post-closing trial balance 4. Prepare a trial balance 3. Post to ledger accounts 5. Journalize and post adjusting entries

5. Double entry accounting According to Pacioli, “ Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In accounting terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance.” Luca Pacioli Developer of Double-Entry Accounting, c1494 Scale or Balance Receive DEBIT Give CREDIT

8. Debits and Credits Account Name Debit / Dr. Credit / Cr. If Debit entries are greater than Credit entries, the account will have a debit balance. $10,000 Transaction #2 $3,000 $15,000 8,000 Transaction #3 Balance Transaction #1

9. Debits and Credits If Credit entries are greater than Debit entries, the account will have a credit balance. $10,000 Transaction #2 $3,000 $1,000 8,000 Transaction #3 Balance Transaction #1

10. Debits and Credits Summary Normal Balance Credit Normal Balance Debit

11. Debits and Credits Summary Balance Sheet Income Statement = + - Asset Liability Equity Revenue Expense Debit Credit

14. The Accounting Cycle Transactions 1. Journalization 6. Financial Statements 7. Closing entries 8. Post-closing trail balance 9. Reversing entries 3. Trial balance 2. Posting 5. Adjusted trial balance 4. Adjustments Work Sheet

21. 2. Posting Posting – the process of transferring amounts from the journal to the ledger accounts. General Ledger General Journal Jan. 3 Sale of stock GJ1 100,000 100,000 100 GJ1

22. 3. Trial Balance Trial Balance – a list of each account and its balance; used to prove equality of debit and credit balances.

25. Classes of Adjusting Entries 1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. Prepayments 3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. 2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned. Accruals

27. Adjusting Entries – “Prepaid Expenses” Example: On Jan. 1 st , Phoenix Corp. paid $12,000 for 12 months of insurance coverage. Show the journal entry to record the payment on Jan. 1 st . Cash 12,000 Prepaid insurance 12,000 Jan. 1 Debit Credit Prepaid Insurance 12,000 12,000 Debit Credit Cash

28. Adjusting Entries – “Prepaid Expenses” Example: On Jan. 1 st , Phoenix Corp. paid $12,000 for 12 months of insurance coverage. Show the adjusting journal entry required at Jan. 31 st . Prepaid insurance 1,000 Insurance expense 1,000 Jan. 31 Debit Credit Prepaid Insurance 12,000 1,000 Debit Credit Insurance expense 1,000 11,000

30. Adjusting Entries – “Unearned Revenues” Example: On Nov . 1 st , Phoenix Corp. received $24,000 from city School for 3 months rent in advance. Show the journal entry to record the receipt on Nov. 1 st . Unearned rent revenue 24,000 Cash 24,000 Nov. 1 Debit Credit Cash 24,000 24,000 Debit Credit Unearned Rent Revenue

31. Adjusting Entries – “Unearned Revenues” Example: On Nov. 1 st , Phoenix Corp. received $24,000 from city High School for 3 months rent in advance. Show the adjusting journal entry required on Nov. 30 th . Rent revenue 8,000 Unearned rent revenue 8,000 Nov. 30 Debit Credit Rent Revenue 8,000 24,000 Debit Credit Unearned Rent Revenue 8,000 16,000

34. Adjusting Entries – “Accrued Revenues” Example: On July 1 st , Phoenix Corp. invested $300,000 in securities that return 5% interest per year. Show the journal entry to record the investment on July 1 st . Cash 300,000 Investments 300,000 July 1 Debit Credit Investments 300,000 300,000 Debit Credit Cash

35. Adjusting Entries – “Accrued Revenues” Example: On July 1 st , Phoenix Corp. invested $300,000 in securities that return 5% interest per year. Show the adjusting journal entry required on July 31 st . Interest revenue 1,250 Interest receivable 1,250 July 31 Debit Credit Interest Receivable 1,250 1,250 Debit Credit Interest Revenue

37. Adjusting Entries – “Accrued Expenses” Notes payable 200,000 Cash 200,000 Feb. 2 Debit Credit Cash 200,000 200,000 Debit Credit Notes Payable Example: On Feb. 2 nd , Phoenix Corp. borrowed $200,000 at a rate of 9% per year. Interest is due on first of each month. Show the journal entry to record the borrowing on Feb. 2 nd .

38. Adjusting Entries – “Accrued Expenses” Example: On Feb. 2 nd , Phoenix Corp. borrowed $200,000 at a rate of 9% per year. Interest is due on first of each month. Show the adjusting journal entry required on Feb. 28 th . Interest payable 1,500 Interest expense 1,500 Feb. 28 Debit Credit Interest Expense 1,500 1,500 Debit Credit Interest Payable

39. 5. Adjusted Trial Balance Shows the balance of all accounts, after adjusting entries, at the end of the accounting period. Assets (Various) Unbilled Services Receivable Inventory Prepaid Rent Prepaid Insurance Buildings Equipment Land Liabilities (Various) Accrued Wages Payable Accrued Interest Payable Unearned Revenue Owner’s Equity Stock Retained Earnings

40. 6. Preparing Financial Statements Financial Statements are prepared directly from the Adjusted Trial Balance. Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings

41. 6. Preparing Financial Statements Balance Sheet Assume the following Adjusted Trial Balance

42. 6. Preparing Financial Statements Income Statement Assume the following Adjusted Trial Balance

43. 6. Preparing Financial Statements Statement of Retained Earnings Assume the following Adjusted Trial Balance

45. 7. Closing Entries Example : Assume the following Adjusted Trial Balance

46. 7. Closing Entries Example: Prepare the Closing journal entry from the adjusted trial balance on the previous slide. Sales 185,000 Income summary 202,000 Interest income 17,000 Income summary 115,000 Cost of goods sold 47,000 Salary expense 25,000 Depreciation expense 43,000 Income summary 87,000 Retained earnings 87,000 Retained earnings 10,000 Dividends declared 10,000

47. By Hashim Khan BBA(Hons) IMStudies University Of Peshawar