CHAPTER 2

THE ACCOUNTING

CYCLE

09/15/25 1
 Contents

1. Capturing Economic Events

2. Accruals and Deferrals:
Adjustment
3. Reporting Financial Results

09/15/25 2
 Learning objectives
[Link] the steps in the accounting cycle and discuss the
role of accounting records in an organization
[Link] a ledger account and a ledger
[Link] how a balance sheet accounts are increased
or decreased
[Link] the double entry system of accounting
[Link] the purpose of a journal and its relationship to the
ledger
[Link] the nature of net income, revenue and expenses
[Link] the realization and matching principles in recording
revenue and expenses
[Link] how revenue and expense transactions are
recorded in an accounting system
[Link] a trial balance and explain its uses and
limitations
[Link] between accounting cycle procedures and
the knowledge of accounting
 The Accounting Cycle
 The sequence of accounting procedures used to
record, classify, and summarize accounting
information in financial reports at regular intervals is
often termed the accounting cycle.
The accounting cycle generally consists of eight specific
steps:
• Journalize (record) transactions,
• Post each journal entry to the appropriate ledger
accounts,
• Prepare unadjusted trial balance.
• Making end-of-period adjustments,
• Preparing an adjusted trial balance,
• Preparing financial statements,
• Journalizing and posting closing entries, and
• Preparing an after-closing trial balance.
09/15/25 4
The Role of Accounting
Records
Establishes
Establishesaccountability
accountabilityfor
forassets
assetsand
and
transactions.
transactions.

Keeps
Keepstrack
trackof
ofroutine
routinebusiness
business
activities.
activities.

Obtains
Obtainsdetailed
detailedinformation
informationabout
aboutaa
particular
particulartransaction.
transaction.

Evaluates
Evaluatesefficiency
efficiencyand
andperformance
performance
within company.
within company.

Maintains
Maintainsevidence
evidenceof
ofcompany’s
company’s
business
businessactivities.
activities.
 The Ledger

Accounts
Accounts are
are
Cash individual
individual records
records
showing
showing increases
increases
Accounts and
and decreases.
decreases.
Payable

The
The entire
entire group
group of
of
Capital accounts
accounts is is kept
kept
Stock
together
together in in an
an
accounting
accounting record
record
called
called aa ledger.
ledger.
 The Ledger
The Ledger or general ledger is the complete collection of all
the accounts of a company.
• Accounts fall into two general groups:
1. Balance sheet (assets, liabilities, & shareholders equity)
accounts.
2. Income statement ( revenues & expenses) accounts.
• Balance sheet accounts are real accounts because they
are not sub-classifications or subdivisions of any other
account.
• They are permanent accounts because their balances are
not transferred (closed) to any other account at the end of
the accounting period.
• Income statement & dividend accounts are nominal
accounts because they are merely sub-classifications of the
SHE accounts.
• Nominal (temporary) accounts temporarily contain
revenue, expense, & dividend information i.e., transferred
(closed) to the RE account at the end of the accounting
period.
09/15/25 7
 Chart of Accounts
Chart of Accounts: is the complete listing of
the titles & numbers of all the accounts in the
ledger.
• The groups of accounts usually appear in the
order of assets, liabilities, SHE, dividends,
revenues, & expenses.
• Assets = 100-199
• Liabilities =200-299
• SHE =300-399
• Revenues =400-499
• Expenses =500-599
09/15/25 8
 The Use of Accounts

Increases are
recorded on one Title of Account
side of the T-
account, and Left Right
decreases are or or
recorded on the Debit Credit
other side. Side Side
 Debits and Credits
• Debit indicates left and Credit indicates right
• Recording on the left side of an account is
debiting the account
• Recording on the right side is crediting the
account
• If the total of debit amounts is bigger than
credits, the account has a debit balance
• If the total of credit amounts is bigger than
debits, the account has a credit balance

09/15/25 10
 Debit and Credit Entries

Cash
Cash
Receipts are
5/1
5/1 8,000
8,000 5/2
5/2 2,500
2,500 Payments are
on the debit
side.
5/25
5/25 75
75 5/8
5/8 2,000
2,000 on the credit
side.
5/29
5/29 750
750 5/28
5/28 150
150
5/31
5/31 50
50
5/31
5/31 4,125
4,125 The
Thebalance
balanceis
isthe
the
difference
differencebetween
betweenthe
Bal.
Bal. debit
debitand
andcredit
the
creditentries
entriesin
in
the
theaccount.
account.
 Debit and Credit Rules

Debits
Debits and
and credits
credits affect
affect accounts
accounts as
as
follows:
follows:

A = L + OE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase
 What is Net Income?

Net
Net income
income is
is not
not an asset it’s
an asset it’s anan increase
increase in
in
owners’
owners’ equity
equity from
from profits
profits of
of the
the business.
business.

A = L + OE
Increase Decrease Increase

Either (or both) of these . . . but this is

effects occur as net income what “net income”
is earned . . . really means.
 Retained Earnings

A = L + SHE
Capital Retained
Stock Earnings

The balance in the Retained Earnings

account represents the total net income
of the corporation over the entire lifetime
of the business, less all amounts which
have been distributed to the
Revenue and Expenses
The price for
goods sold
and services Increases
rendered owner’s
during a given equity.
accounting
period.

The costs of
goods and Decreases
services used owner’s
up in the equity.
process of
earning
 The Realization Principle:
When To Record Revenue

Realization
Principle
Recognize revenue in
the accounting period
in which the
performance
obligation is satisfied.
 The Matching Principle:
When To Record Expenses

Matching
Principle
Companies recognize
expenses in the period
in which they make
efforts (consume
assets or incur
liabilities) to generate
revenue.
 Debits and Credits for
Revenue and Expense

Expenses EQUITIES Revenues

decrease Debit Credit increase
owner’s for for owner’s
equity. Decrease Increase equity.

EXPENSES REVENUES
Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase
 Investments by and Payments
to Owners
Payments to Owners’
EQUITIES
owners investments
decrease Debit Credit increase
for for
owners’ Decrease Increase owners’
equity. equity.

DIVIDENDS CAPITAL STOCK

Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase
 Summary of Debit and Credit
Rules
Debits Credits
1. Increase assets. 1. Decrease assets
2. Decrease liabilities. 2. Increase liabilities
3. Decrease stockholders’ 3. Increase stockholders’
equity. equity
4. Decrease revenues. 4. Increase revenues
5. Increase expenses. 5. Decrease expenses
6. Increase dividends. 6. Decrease dividends.
 Normal Balances
Types of Accounts Normal Balances
Dr. Cr.
Assets xx -
Liabilities - xx
Shareholders’ Equity
Capital Stock - xx
Retained Earning - xx
Dividends xx -
Expenses xx -
Revenues - xx

09/15/25 21
 Double Entry System
• The accounting requirement that each transaction
be recorded by an entry that has equal debits &
credits is called double-procedure; or duality.
• This double–entry procedure keeps the accounting
equation in balance.
• The dual recording process produces two sets of
accounts- those with debits balances & those
credit balances.
• The totals of theses two groups of accounts must
be equal.
• Then, some assurance exists that arithmetic part
of the transaction recording process has been
properly carried out.
09/15/25 22
 Double Entry Accounting
---The Equality of Debits
and Credits

A = L + OE
=
Debit Credit
balances balances

In
In the
the double-entry
double-entry accounting
accounting system,
system,
every
every transaction
transaction is
is recorded
recorded by
by equal
equal
dollar
dollar amounts
amounts of
of debits
debits and
and credits.
credits.
 The Journal
Journal: is a chronological (arrangement in order
of time) record of business transactions.
• In an actual accounting system, transactions are
initially recorded in the journal.
• A journal entry is the recording of a business
transaction in the journal.
• A journal entry shows all the effects of a business
transaction as expressed in debit(s) & credit(s) &
may include an explanation of the transaction.
• A transaction is entered in a journal before it is
entered in ledger accounts. (that is why a journal
is being called as a book of original entry)

09/15/25 24
 General Journal
 General Journal: contains all types of entry
such as cash payments & receipts,
receivable, sales, purchase, etc.
General Journal contains the following
information:
1. Date column-year, month, & day.
2. Account titles & explanation column:
shows accounts debited & credited &
necessary explanations.
3. Posting reference column: shows the
account number of debited & credited.
4. Debit column: show the amount of debit.
5. Credit column: show the amount of credit
09/15/25 25
 Functions & Advantages of Using
Journal
• Record transactions in chronological order.
• Shows the analysis of each transaction in debits & credits.
• Supplies an explanation of each transaction when
necessary.
• Serves as a source for future reference to accounting
transactions.
• Eliminates the need for lengthy explanations from the
accounts.
• Makes possible posting to the ledger at convenient times.
• Assists in maintaining the ledger in balance b/c the
debit(s) must always equal in the credit(s) in each journal
entry.
• Aids in tracing errors when the ledger is not in balance.

09/15/25 26
 Journalizing & Posting
Transactions
Assets
Assets = Liabilities
Liabilities + Equity
Equity
T- Account
(Left side) (Right side)
Debit Credit

Step 1: Analyze
Step 2: Apply double-
transactions and source
entry accounting
documents.

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledger Step 3: Record journal entry

 The
The Recording
Recording Process
Process Illustrated
Illustrated
Follow these steps:
1. Determine what
type of account is
involved.
2. Determine what
items increased
or decreased and
by how much.
3. Translate the
increases and
decreases into
debits and
credits.
The
The Recording
Recording Process
Process Illustrated
Illustrated
 Posting Journal Entries to the
Ledger Accounts

Posting
involves
copying
information
from the
journal to the
ledger
accounts.
 Posting
Posting

Posting – the
process of
transferring
amounts from
the journal to
the ledger
accounts.
 The Trial Balance
• Periodically accountants use a trial balance to test the
equality of their debits & credits.
• A trial balance is the listing of the ledger accounts &
their debit or credit balances to determine that debits
equal credits in the recording process.
• The accounts appear in the order of assets, liabilities, SHE,
dividends, revenues & expenses.
• With in the asset category, the most liquid (closest to
becoming cash) asset appears first & the least liquid
appears last.
• With in the liabilities, those liabilities with the shortest
maturities appear first.
• Note the listing of the account numbers & account titles on
the left, the column for Dr. balances, the column for Cr.
Balances, & the equality of the two totals.
09/15/25 32
 Cont…
• When the TB doesn’t balance, try retotaling
the two columns.
• If this step doesn’t locate the error, divide the
difference in the totals by 2 & then by 9.
• If the difference is divisible by 2, you may have
transferred a debit balance account to the
TB as a credit, or a credit balance account
as a debit.
• When the difference is divisible by 2, look for
an amount in the TB that is equal to one half of
the difference.
09/15/25 33
 Cont…
E.g. If the difference is $400, look for an amount with
a balance of $200 & see if it is in the wrong column.
• If the difference is divisible by 9, you may have made
a transposition error in transferring a balance to
the TB or a slide error.
• A transposition error occurs when two digits are
reversed in the amount ( e.g. 435 as 345 or 110 as
101).
• A slide error occurs when you place a decimal point
incorrectly (e.g., 1,300 recorded as 13.00).

09/15/25 34
 Cont…
• If you still can’t find the error, it may be due
to the following causes:
1. Failing to post part of a journal entry.
2. Posting a Dr. as a Cr., or vice versa.
3. Incorrectly determining the balance of an
account.
4. Recording the balance of an account
incorrectly in the TB.
5. Omitting an account from the TB.

09/15/25 35
 Cont…
• The equality of the two totals in the TB doesn’t
necessarily mean that the accounting process
has been error-free.
• Serious errors may have been made, such as
failure to record a transaction, or posting
a Dr. or Cr. To the wrong account.
• For e.g., if a transaction involving cash receipt
of $150 is never recorded, the TB total still
balance, but an amount that is $ 150 too high.
• Both Cash & Revenue would be understated by
$150.

09/15/25 36
 JJ's Lawn Care Service All balances
Unadjusted Trial Balance are taken from
May 31, 2003 the ledger
accounts on
Cash $ 3,925
Accounts receivable 75 May 31 after
Tools & equipment 2,650 considering all
Truck 15,000 of JJ’s
Notes payable $ 13,000 transactions
Accounts payable 150 for the month.
Capital stock 8,000
Dividends 200 Proves equality
Sales revenue 750 of debits and
Gasoline expense 50 credits.
Total $ 21,900 $ 21,900
 The Accounting Cycle

Make end-of-
Journalize year
Post entries to Prepare trial
transactions. adjustments.
the ledger balance.
accounts.

Prepare after closing Journalize and Prepare Prepare adjusted

trial balance. post closing financial trial balance.
entries. statements.
 Basis of Accounting
 The following are the basic systems of
recording business transactions
1. Cash Basis Accounting: According to
this basis, only actual cash receipts &
payments are recorded in the books.
 The credit transactions are not recorded at
all, till actual cash is received or paid.

09/15/25 39
 Cont…
• This basis of accounting is mostly followed by
non-trading organizations, professionals like
lawyers, doctors, chartered accountants, etc.
• Companies using the cash basis do not
have to prepare any adjusting entries
unless they discover they have made a
mistake in preparing an entry during the
accounting period.

09/15/25 40
 Cont…
2. Accrual Basis: all the business transactions
pertaining to the specific period, whether of
cash or credit nature, are recorded in the
books.
• revenue is recognized when it is earned &
expense is recognized when obligation of
payment arises.
• Revenues are recognized when sales are
made or services are performed, regardless
of when cash is received.

09/15/25 41
 Cont…
• Expenses are recognized as incurred,
whether or not cash has been paid out.
• Actual movement of cash is irrelevant.
• Accrual basis of accounting is widely
followed by the industrial and
commercial undertakings because it takes
into account the effects of all transactions
already entered into.
• Adjusting entries are needed to bring the
account up to date for unrecorded
economic activity that has taken place.
09/15/25 42
 Summary

Cash Basis Accrual Basis

Revenue is As cash is As earned (goods
recognized received are delivered or
services are
performed)
Expenses As cash is As incurred to
are paid produce revenues.
recognized

09/15/25 43
 ADJUSTING ENTRIES
• Adjusting entries are accounting journal
entries that convert a company's accounting
records to the accrual basis of accounting.
• An adjusting journal entry is typically made
just prior to issuing a company's FSs.
• They are journal entries made at the end of
an accounting period or at any time FSs are
to be prepared to bring about proper
matching of revenues & expenses.
• Done to bring the books up to date in
anticipation of the preparation of the FSs.

09/15/25 44
 The Need for Adjusting
•
Entries
Each adjusting entry has a dual purpose:
1. To make the income statement report the
proper revenue or expense, &
2. To make the balance sheet report the proper
asset or liability.
• Thus, every adjusting entry affects at least
one income statement account & one balance
sheet account.
• Adjusting entries are required to implement
the accrual accounting model.
• More specifically, these entries are required to
satisfy the realization & matching principle.
45
 Types of Adjusting Entries

1.
1. Converting
Converting 2.
2. Converting
Converting
assets
assets to
to liabilities
liabilities to
to
expenses
expenses revenue
revenue

3.
3. Accruing
Accruing 4.
4. Accruing
Accruing
unpaid
unpaid uncollected
uncollected
expenses
expenses revenues
revenues
 Converting Assets to
Expenses
End of Current Period
Prior Periods Current Period Future Periods

Transaction
Transaction Adjusting
Adjusting Entry
Entry
Paid
Paid future
future 
 Recognize
Recognize
expenses
expenses in in portion
portion
advance
advance of
of asset
asset
(creates
(creates an
an consumed
consumed
asset).
asset). as
as expense,
expense, and
and

 Reduce
Reduce balance
balance
 Converting Assets to
Expenses

Examples Include:
Depreciation
Supplies
Expiring Insurance
Policies
 Converting Assets to
Expenses
$2,400 Insurance Policy
Coverage for 12 Months

$200 Monthly Insurance Expense

Jan. 1 Dec. 31

On
On January
January 1,
1, Webb
Webb Co.
Co. purchased
purchased aa
one-year
one-year insurance
insurance policy
policy for
for $2,400.
$2,400.
 Converting Assets to
Expenses
Initially,
Initially, costs
costs that
that benefit
benefit more
more than
than one
one
accounting
accounting period
period are
are recorded
recorded as
as assets.
assets.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Jan. 1 Unexpired Insurance 2,400
Cash 2,400
Purchase a one-year insurance policy.
 Converting Assets to
Expenses
The
The costs
costs are
are expensed
expensed as
as they
they are
are
used
used to
to generate
generate revenue.
revenue.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Monthly Adjusting Entry for Insurance
Jan. 31 Insurance Expense 200
Unexpired Insurance 200
Insurance expense for January.
 Converting Assets to
Expenses
Balance
Balance Sheet
Sheet Income
Income Statement
Statement
Cost
Cost of
of assets
assets Cost
Cost of
of assets
assets
that
that benefit
benefit used
used this
this period
period to
to
future
future periods.
periods. generate
generate revenue.
revenue.

Unexpired Insurance Insurance Expense

1/1 2,400 1/31 200 1/31 200
Bal. 2,200
 The Concept of Depreciation

Depreciable
Depreciable assets
assets are
are physical
physical
objects
objects that
that retain
retain their
their size
size and
and
shape
shape but
but lose
lose their
their economic
economic
usefulness
usefulness over
over time.
time.

Depreciation
Depreciation isis the
the systematic
systematic
allocation
allocation ofof the
the cost
cost ofof aa
depreciable
depreciable asset
asset to
to expense.
expense.
 The Concept of Depreciation

The
The portion
portion of
of an
an asset’s
asset’s utility
utility that
that is
is
used
used up
up must
must be
be expensed
expensed in
in the
the period
period
used.
used.
Fixed
Fixed The asset’s Accumulated
usefulness is Accumulated
Asset
Asset Depreciation
partially Depreciation
(debit)
(debit) (credit)
consumed (credit)
On date during the At end of
when initial period. period . . .
payment is
made . . . Depreciation
Depreciation
Cash
Cash Expense
Expense
(credit)
(credit) (debit)
(debit)
 Depreciation Is Only an
Estimate
On May 2, 2003, JJ’s Lawn Care Service
purchased a lawn mower with a useful
life of 50 months for $2,500 cash.
Using the straight-line method, calculate
the monthly depreciation expense.

Depreciation
Cost of the asset
expense (per =
Estimated useful life
period)

$50 = $2,500
50
 Depreciation Is Only an
Estimate

JJ’s
JJ’s Lawn
Lawn Care
Care Service
Service would
would make
make
the
the following
following adjusting
adjusting entry.
entry.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Depreciation Expense: Tools & Eq. 50
Accumulated Depreciation: Tools & Eq. 50
To record one month's depreciation.

Contra-asset
Contra-asset
 Depreciation Is Only an
Estimate

JJ’s
JJ’s $15,000
$15,000 truck
truck is
is depreciated
depreciated over
over
60
60 months
months as
as follows:
follows:

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
May 31 Depreciation Expense: Truck 250
Accumulated Depreciation: Truck 250
To record one month's depreciation.

$15,00060
$15,00060 months
months == $250
$250 per
per month
month
 Accumulated
Accumulated depreciation
depreciation
would
would appear
appear on
on the
the balance
balance
sheet
sheet as
as follows:
follows:
 Converting Liabilities to
Revenue
End of Current Period
Prior Periods Current Period Future Periods

Transaction
Transaction Adjusting
Adjusting Entry
Entry
Collected
Collected 
 Recognize
Recognize
from
from portion
portion
customers
customers in in earned
earned as
as
advance
advance revenue
revenue,,
(creates
(creates aa and
and
liability).
liability). 
 Reduce
Reduce balance
balance
of
of
 Converting Liabilities to
Revenue

Examples Include:
Airline Ticket Sales
Sports Teams’ Sales of
Season Tickets
 Converting Liabilities to
Revenue

$6,000 Rental Contract

Coverage for 12
Months
$500 Monthly Rental Revenue

Jan. 1 Dec. 31

On
On January
January 1,1, Webb
Webb Co.
Co. received
received
$6,000
$6,000 inin advance
advance for
for aa one-year
one-year
rental
rental contract.
contract.
 Converting Liabilities to
Revenue

Initially,
Initially, revenues
revenues that that benefit
benefit more
more
than
than oneone accounting
accounting period
period are
are
recorded
recorded as as liabilities.
liabilities.
GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Jan. 1 Cash 6,000
Unearned Rental Revenue 6,000
Collected $6,000 in advance for rent.
 Converting Liabilities to
Revenue

Over
Over time,
time, the
the revenue
revenue is
is recognized
recognized
as
as it
it is
is earned.
earned.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Monthly Adjusting Entry for Rent Revenue
Jan. 31 Unearned Rental Revenue 500
Rental Revenue 500
Rental revenue for January.
 Converting Liabilities to
Revenue

Balance
Balance Sheet
Sheet Income
Income Statement
Statement
Liability
Liability for
for Revenue
Revenue earned
earned
future
future periods.
periods. this
this period.
period.

Unearned Rental Revenue Rental Revenue

1/31 500 1/1 6,000 1/31 500
Bal. 5,500
 Accruing Unpaid Expenses

End of Current Period

Prior Periods Current Period Future Periods

Adjusting
Adjusting Entry
Entry Transaction
Transaction
1.
1. Recognize
Recognize Liability
Liability
expense
expense will
will be
be
incurred,
incurred, and
and paid.
paid.
2.
2. Record
Record liability
liability
for
for
future
future payment.
payment.
 Accruing Unpaid Expenses

Hey, when
do we get
paid?
Examples Include:
Interest
Wages and Salaries
Property Taxes
 Accruing Unpaid Expenses

$3,000 Wages
Expense

Monday, Wednesday, Friday,

May 29 May 31 June 2

On
On May
May 31,
31, Webb
Webb [Link]. owes
owes wages
wages of
of
$3,000.
$3,000. Pay
Pay day
day is
is Friday,
Friday, June
June 2.
2.
 Accruing Unpaid Expenses

Initially,
Initially, an
an expense
expense and
and aa liability
liability
are
are recorded.
recorded.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
May 31 Wages Expense 3,000
Wages Payable 3,000
To accrue wages owed to employees.
 Accruing Unpaid Expenses

Income
Income Statement
Statement
Balance
Balance Sheet
Sheet
Cost
Cost incurred
incurred this
this
Liability
Liability toto be
be paid
paid period
period toto generate
generate
in
in aa future
future period.
period. revenue.
revenue.

Wages Payable Wages Expense

5/31 3,000 5/31 3,000
 Accruing Unpaid Expenses

$5,000 Weekly Wages

$3,000 Wages $2,000 Wages

Expense Expense

Monday, Wednesday, Friday,

May 29 May 31 June 2

Let’s
Let’s look
look at
at the
the entry
entry for
for June
June 2.
2.
 Accruing Unpaid Expenses

The
The liability
liability is
is extinguished
extinguished when
when the
the
debt
debt is
is paid.
paid.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
June 2 Wages Expense (for June) 2,000
Wages Payable (accrued in May) 3,000
Cash 5,000
Weekly payroll for May 29-June 2.
 Accruing Uncollected
Revenue
End of Current Period
Prior Periods Current Period Future Periods

Adjusting
Adjusting Entry
Entry Transaction
Transaction
1.
1. Recognize
Recognize Receivable
Receivable
revenue
revenue will
will be
be
earned
earned but
but not
not collected.
collected.
yet
yet
recorded,
recorded, and
and
2.
2. Record
Record
 Accruing Uncollected
Revenue

Examples Include:
Interest Earned
Work Completed But
Not Yet Billed to
Customer
 Accruing Uncollected
Revenue

$170 Interest
Revenue

Saturday, Monday, Tuesday,

Jan. 15 Jan. 31 Feb. 15
On
On Jan.
Jan. 31,
31, the
the bank
bank owes
owes Webb
Webb Co.
Co.
interest
interest of of $170.
$170. Interest
Interest is
is paid
paid on
on
the
the 15 th day of each month.
15th day of each month.
 Accruing Uncollected
Revenue

Initially,
Initially, the
the revenue
revenue is is recognized
recognized
and
and aa receivable
receivable is
is created.
created.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Jan. 31 Interest Receivable 170
Interest Revenue 170
To recognize interest revenue.
 Accruing Uncollected
Revenue

Balance
Balance Sheet
Sheet
Income
Income Statement
Statement
Receivable
Receivable toto
be
be collected
collected in
in aa Revenue
Revenue earned
earned
future
future period.
period. this
this period.
period.

Interest Receivable Interest Revenue

1/31 170 1/31 170
 Accruing Uncollected
Revenue
$320 Monthly Interest

$170 Interest $150 Interest

Revenue Revenue

Saturday, Monday, Tuesday,

Jan. 15 Jan. 31 Feb. 15

Let’s
Let’s look
look at
at the
the entry
entry for
for February
February
15.
15.
 Accruing Uncollected
Revenue

The
The receivable
receivable is
is collected
collected in
in aa future
future
period.
period.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Feb. 15 Cash 320
Interest Revenue (for February) 150
Interest Receivable (accrued Jan. 31) 170
To record interest received.
 Accruing Income Taxes
Expense: The Final Adjusting
Entry
As
As aa corporation
corporation earns
earns taxable
taxable income,
income, it
it
incurs
incurs income
income taxes
taxes expense,
expense, and
and also
also aa
liability
liability to
to governmental
governmental tax
tax authorities.
authorities.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Dec. 31 Income Taxes Expense 780
Income Taxes Payable 780
Estimated income taxes applicable to
taxable income earned in December.
 Adjusting Entries and
Accounting Principles
Costs
Costs are
are matched
matched with
with
revenue
revenue in
in two
two ways:
ways:

1. Direct
1. Direct association
association of
of costs
costs
with
with specific
specific revenue
revenue
transactions.
transactions.

2. Systematic
2. Systematic allocation
allocation ofof
costs
costs over
over the
the “useful
“useful life”
life”
of
of the
the expenditure.
expenditure.
 The Concept of Materiality

An
An item
item is
is “material”
“material” if
if knowledge
knowledge
of
of the
the item
item might
might reasonably
reasonably
influence
influence the
the decisions
decisions ofof users
users of
of
financial
financial statements.
statements.
Many companies
immediately
charge the cost Lightbulbs
of immaterial
items to
Supplies
expense.
 Effects of the Adjusting
Entries

Make end-of-
Journalize year
Post entries to Prepare trial
transactions. adjustments.
the ledger balance.
accounts.

After
After the
the adjusting
adjusting entries
entries are
are
made,
made, an
an adjusted
adjusted trial
trial
balance
balance is
is prepared.
prepared. Prepare adjusted
trial balance.
 Effects of Failing to Prepare
Adjusting Entries
Failure to Recognize Effect on Net Income Effect on B/Sheet

1. Consumption of Overstates net income Overstates assets

benefits of an asset Overstates REs

( prepaid expense)
[Link] of previously Understates net income Overstatesliabilities
unearned revenue Understates REs

[Link] of revenue Understate net income Understates assets

Understates REs

[Link] of expense Overstates NI Understates liabilities

Overstates REs

09/15/25 83
 Reporting Financial Results
• The purpose of each of the steps in the
processing cycle to this point is to provide
information-preparation of the financial
statements.
Work Sheet
• Is the a columnar sheet of paper or a
computer spreadsheet on which
accountants summarize information
needed to make the adjusting & closing
entries & to prepare the financial
statements.
09/15/25 84
• A worksheet is only an accounting tool & not
part of the formal accounting records.
• Accountants prepare work sheets each time
financial statements are needed-monthly,
quarterly, or at the end of the accounting
year.
Parts of a Work Sheet
[Link] unadjusted trial balance
[Link]
[Link] trial balance
[Link] statement
[Link] of retained earnings
[Link] sheet
09/15/25 85
 Steps for Work Sheet Preparation
1. Enter the titles & balances of ledger accounts
in the TB columns.
2. Enter adjustments in the adjustment columns.
3. Enter adjusted account balances in the
adjusted TB column.
4. Extend adjusted balances of revenues &
expenses accounts from the adjusted TB
columns to the income statement columns.
5. Extend any balances in the REs & Dividends
accounts to the statement of REs columns.
6. Extend adjusted balances of asset, liability, &
capital stock accounts from the adjusted TB
columns the B/S columns.
09/15/25 86
The Worksheet

87
 JJ's Lawn Care Service
Trial Balance This
This is
is the
the Trial
Trial
May 31, 2003 Balance
Balance for for JJ’s.
JJ’s.
Cash $ 3,925
Accounts receivable 75
Tools & equipment 2,650
Truck 15,000
Notes payable 13,000
Accounts payable 150
Capital stock 8,000
Dividends 200
Sales revenue 750
Gasoline expense 50
Total $ 21,900 $ 21,900
 JJ's Lawn Care Service This
This is
is the
the
Adjusted Trial Balance
May 31, 2003
Adjusted
Adjusted TrialTrial
Cash $ 3,925
Balance
Balance for
for JJ’s.
JJ’s.
Accounts receivable 75
Tools & equipment 2,650
Accumulated depr.:
tools & eq. $ 50
Truck 15,000
Accumulated depr.:
truck 250
Notes payable 13,000 Now,
Now, let’s
let’s
Accounts payable 150 prepare
prepare the
the
Capital stock 8,000
Dividends 200 financial
financial
Sales revenue 750 statements
statements forfor
Gasoline expense 50
Depr. exp.: tools &
JJ’s
JJ’s Lawn
Lawn Care
Care
eq. 50 Service
Service for
for May.
May.
Depr. exp.: truck 250
Total $ 22,200 $ 22,200
 JJ's Lawn Care Service
Income Statement
For the month ending May 31, 2003
Sales revenue $ 750
Operating expenses:
Gasoline expense $ 50
Depr. exp.: tools & eq. 50
Depr. exp.: truck 250 350
Net income $ 400
Net
Net income
income also
also appears
appears on
on the
the
Statement
Statement of
of Owner’s
Owner’s Equity.
Equity.
 Statement of Retained
Earnings
This statement summarizes the
increases and decreases in Retained
Earnings during the period.

•Business •Dividends
Earnings •Business
Losses
 JJ's Lawn Care Service
Balance Sheet
May 31, 2003

Assets
Cash $ 3,925
Accounts receivable 75
Tools & equipment $ 2,650
Less: Accum. depr.: tools & eq. 50 2,600
Truck $ 15,000
Less: Accum. depr.: truck 250 14,750
Total assets $ 21,350
Liabilities & Stockholders' Equity
Liabilities:
Notes payable $ 13,000
Accounts payable 150
Total liabilities $ 13,150
Stockholders' equity:
Capital stock $ 8,000
Retained earnings 200
Total stockholders' equity 8,200
Total liabilities & stockholders' equity $ 21,350
 JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Cash flows from investing activities:
Purchase of lawn mower $ (2,500)
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners $ 8,000
Dividends (200)
Net cash provided by financing activities 7,800
Increase in cash for month $ 3,925
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 $ 3,925
 Drafting Notes to the
Financial Statements
Examples
Examples of
of Items
Items Disclosed
Disclosed
Lawsuits
Lawsuits pending
pending
Notes to the
Financial Statements Scheduled
Scheduled plant
plant closings
closings
Governmental
Governmental investigations
investigations
Significant
Significant events
events occurring
occurring
after
after the
the balance
balance sheet
sheet date
date
Specific
Specific customers
customers that that
account
account for
for aa large
large portion
portion
of
of
revenue
revenue
Unusual
Unusual transactions
transactions andand
related
related party
party transactions
transactions
 Closing the Temporary
Accounts
 Close Revenue The closing process
gets the temporary
accounts to Income
accounts ready for
Summary.
the next
Close Expense accounting period.
accounts to Income
Summary.

 Close Income
Summary account to
Retained Earnings.

Close Dividends to
Retained Earnings.
 Closing Entries for Revenue
Accounts
Since
Since Sales
Sales Revenue
Revenue has
has aa credit
credit balance,
balance,
the
the closing
closing entry
entry requires
requires aa debit
debit to
to the
the
Sales
Sales Revenue
Revenue account.
account.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Sales Reveune 750
Income Summary 750
To close the revenue account.
Closing Entries for Revenue
Accounts

Income Summary Sales Revenue

750 750 750

750
 Closing Entries for Expense
Accounts
Since
Since expense
expense accounts
accounts have
have aa debit
debit
balance,
balance, the
the closing
closing entry
entry requires
requires aa credit
credit
to
to the
the expense
expense accounts.
accounts.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Income Summary 350
Gasoline Expense 50
Depreciation Exp.: Tools & Equipment 50
Depreciation Exp.: Truck 250
To close the expense accounts.
Closing Entries for Expense
Accounts
Gasoline Exp.
50 50
-
Income Summary
Depr. Exp.: Tools & 350 750
Equipment
50 50
-

Depr. Exp.: Truck 400

250 250
Net Income
-
 Closing the Income Summary
Account
Since
Since Income
Income Summary
Summary has
has aa $400
$400 credit
credit
balance,
balance, the
the closing
closing entry
entry requires
requires aa debit
debit
to
to Income
Income Summary.
Summary.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Income Summary 400
Retained Earnings 400
To close Income Summary.
Closing the Income Summary
Account

Income Summary
350 750
Retained 400
Earnings
-
400
-
400 The balance in Income
Summary is now zero.
 Closing the Dividends
Account
Since
Since the
the Dividends
Dividends account
account has
has aa debit
debit
balance,
balance, the
the closing
closing entry
entry requires
requires aa credit
credit
to
to the
the Dividends
Dividends account.
account.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Retained Earnings 200
Dividends 200
To close the Dividends account.
 Closing the Dividends
Account

Dividends Retained
Earnings
200 200
200 -
400

- 200
 Post Closing Trial Balance

• The post closing trial balance differs from

the adjusted trial balance in only two
important aspects:
1. It excludes all temporary accounts
since they have been closed; &
2. It updates the REs account to its
proper ending balance.
• The only accounts that should be open
are assets, liabilities, capital stocks, &
retained accounts.
09/15/25 105
 JJ's Lawn Care Service
After-Closing Trial Balance
May 31, 2003
Cash $ 3,925
Accounts receivable 75
Tools & equipment 2,650
Accumulated depr.:
tools & equipment $ 50
Truck 15,000
Accumulated depr.:
truck 250
Notes payable 13,000
Accounts payable 150
Capital stock 8,000
Retained earnings 200
Total $ 21,650 $ 21,650
 Illustration
Record the following transactions in the
general journal.
Jan. 20,2005: owners invested $80,000 in
exchange for capital stock.
Jan. 21, 2005: purchased the land for 52,000
Jan.22,2005: purchased building from Co. M for
36,000; 6000 cash made down payment and
issued a 90 day, non interest bearing note
payable for the remaining 30,000.
Jan. 23, purchased tools and equipment on
account from Snappy tools. The purchase
price was $13,800, due in 60 days.
09/15/25 107
 Cont…
Jan 24, 2005: The company sold the excess tools
on account to co. AC at a price of 1,800. the
tools were sold at a price equal to their cost.
Jan 26, 2005: the company received 600 in
partial collection of the account receivable from
company AC.
Jan. 27, 2005: The company made 6,800 partial
payment of its accounts payable to Snappy
tools.
Jan. 31, 2006: revenue of 2,200 is earned, all of
which was received in cash.
09/15/25 108
 Cont…
Jan.31 Paid employees wages in January,
$1,200.
Jan.31. paid for utilities used in January, $200
Feb. 1. Paid 360 cash news advertising for
February.
Feb. 1. Purchased radio advertising for
February at a cost of 470, payable within 30
days .
Feb.4. Purchased various shop supplies ; cost
1,400, due in 30 days.
Feb.15: collected 4980 cash fro repairs made
to vehicles.
09/15/25 109
 Cont…
Feb. 28 Billed Co. H, 5400 for maintenance
and repair services provided in Feb. The
agreements with co. H calls for payment to
be received by March 10.
Feb. 28 paid employees wages earned in Feb,
4900.
Feb. 28: recorded 1,600 utility bill for Feb. The
entire amount is due March 15.
Feb. 28: The co. declares and pays dividend of
40 cents per share to the owners of its 8000
shares of capital stock – a total of 3,200.

09/15/25 110
 Illustration 2: Adjusting
Entries
Given the following information, prepare
necessary adjusting entries at the end of
the period (December 31).
[Link] December 1, the company signed a
new rental agreement and paid three
months’ rent in advance at a rate of 2100
per month. This advance payment was
debited to the prepaid office rent
account.

09/15/25 111
2. An estimate of supplies on hand was
made December 31; the estimated cost
of the unused supplies was 450. the
amount of supplies presented in the
adjusted trial balance was 600.
3. The useful life of the equipment has
been estimated at five years from date of
acquisition.(assume that the historical
cost is 36,000 with no selvage value at
the end of the useful life)
09/15/25 112
4. Accrued interest on notes payable to
amounted 100 at year end. (set up accounts
for interest expense and interest payable).
5. Consulting services valued at 2850 were
rendered during December to clients who
had made payment in advance.
6. At December 31, consulting services valued
at 11,000 had been rendered to clients but
not yet billed. No advance payment had
been received from these clients
09/15/25 113
7. Salaries earned by employees but not
paid as of December 31 amounted to 1700.
9. Income taxes expense for the year
estimated at 56000. of this amount, 51000
had been recognized as expense in prior
months , and 39,000 had been paid to tax
authorities. The company plans to pay the
17,000 remainder of its income tax liability
on January 15.

09/15/25 114
 Assignment
• Problem 2.10B
• Problem 3.6A
• Problem 4.4 A
• Problem 5.2A, requirement a, b and c

09/15/25 115
 The
The End
End

09/15/25 116