Week 3 Chapter 3 - For Posting Before Class

Understanding
FINANCIAL
ACCOUNTING
Canadian Edition
CHAPTER 3
DOUBLE-ENTRY ACCOUNTING AND THE ACCOUNTING CYCLE
John Wiley & Sons Canada, Ltd. ©2014 Prepared by R. E. Harms CMA
Learning Objectives
2
LO1 – Explain how the double-entry accounting system works,

including how it overcomes the limitations of the template approach.
LO2 – Explain the normal balance concept and how it is used within the
double-entry accounting system.
LO3 – Identify and explain the steps in the accounting cycle.
LO4 – Explain the significance of a company’s decisions regarding its chart
of accounts and the implications of subsequent changes.
LO5 – Explain the difference between permanent and temporary accounts.
LO6 – Identify and record transactions in the general journal and general
ledger.
LO7 – Explain why adjusting entries are necessary and prepare them.
LO8 – Explain why closing entries are necessary and prepare them.
Basic Accounting Equation
3
Assets (Left) = Liabilities + Equity (Right)
Replace with a “T” account
Assets Liabilities + Equity
Left (Debit) Right (Credit)

Double-Entry System
4
Each transaction impacts at least two accounts

total debits equal total credits
Accounting equation stays in balance
Assets (Dr) = Liabilities + Equity (Cr)
Copyright John Wiley & Sons Canada, Ltd.

Why not the Template Method?
5
- cumbersome when large numbers of accounts and transactions

are involved.
- significant limitation of the template method is the number of

columns that can be manageably used; limits the information
that management can capture and analyze in managing the
business.
- double-entry accounting system overcomes this limitation by

enabling companies to use hundreds or even thousands of
accounts to capture information at the level of detail required
to manage the business effectively.
Debits on the Left, Credits on the Right
6
Name of Account
Debit Credit
(Left side) (Right side)
Assets Liabilities + Equity
Cash (A) Accounts Payable (L) Common Shares (E)

 Debit Credit Song
Entries to T Accounts
8
Assets Liabilities
Beginning balance Beginning balance
Increases Decreases Decreases Increases
Ending balance Ending balance
Shareholders’ Equity
Beginning balance
Decreases Increases
Ending balance
Learning Objectives
9
LO1 – Explain how the double-entry accounting system works, including

how it overcomes the limitations of the template approach.
LO2 – Explain the normal balance concept and how it is
used within the double-entry accounting system.
ledger.
Expanded Accounting Equation
Normal Balances
Sample Journal Entry
Transaction Analysis
13
 Transaction 1: On Jan 1, SCL issued 10,000 shares in exchange for

$250,000 cash
 Effects:
 Assets (cash) increased by $250,000
 Shareholder’s Equity (common shares) increased by $250,000
# Date Account Name Debit Credit

1 Jan 1/20 Cash $250,000
Common Shares $250,000
14
 Transaction 2: On Feb 1, SCL borrows $100,000 from the bank, this

is an interest only loan for three years at 6% / annum with interest
payable every three months.
 Effects:
 Assets (cash) increased by $100,000
 Liabilities (Bank Loan Payable) increased by $100,000

2 Jan 1 Cash $100,000
Bank Loan Payable $100,000
15
 Transaction 3: On Jan 1, SCL rents a retail location for

$1,100 / month
 Effects:
 Assets (Cash) decreased by $1,100
 Expenses (Rent expense) increased by $1,100

3 Jan 1 Rent Expense $1,100
Cash $1,100
16
 Transaction 4: On Jan 1, SCL paid $65,000 to purchase equipment.

 Effects:
 Assets (Equipment) increased by $65,000

4 Jan 1 Equipment $65,000
Cash $65,000
17
 Transaction 5: SCL purchases a 1 year insurance policy for the new

equipment for the period from Jan 1 to Dec 31
 Effects:
 Assets (Prepaid Expenses) increased by $1,800

5 Jan 1 Prepaid Expenses $1,800
Cash $1,800
18
 Transaction 6: On Jan 6, SCL purchased land for $180,000 cash.

 Effects:
 Assets (Land) increased by $180,000
 Assets ( Cash) decreased by $180,000

6 Jan 6 Land $180,000
Cash $180,000
19
 Transaction 7: On Jan 6, SCL purchase $23,000 of inventory on

account from its suppliers.
 Effects:
 Assets (Inventory) increased by $23,000
 Liabilities ( Accounts Payable) increased by $23,000

7 Jan 6 Inventory $23,000
Accounts Payable $23,000
20
 Transaction 8: On Jan 6, SCL sold product to customers for $34,000 of

which $21,000 was in cash and the balance on account. The cost of the
products sold was $17,000.
 Effects:
Part 1
 Assets (Cash and A/R) increased by $34,000
 Revenues (Sales Revenue) increased by $34,000

8 Jan 6 Cash $21,000
Accounts Receivable $13,000
Sales Revenue $34,000
21
 Transaction 8 - continued
 Effects:
Part 2
 Assets (Inventory) decreased by $17,000
 Expenses (Cost of Goods Sold) increased by $17,000

8 Jan 6 Cost of Goods Sold $17,000
Inventory $17,000
22
 Transaction 9: On Jan 12, SCL received $11,000 from

customers as payment on outstanding accounts
 Effects:
 Assets (Cash) increased by $11,000
 Assets (Accounts receivable) decreased by $11,000

9 Jan 12 Cash $11,000
Accounts Receivable $11,000
23
 Transaction 10: On Jan 22, SCL makes payments of $13,500 on its

outstanding accounts payable.
 Effects:
 Liabilities (Accounts payable) decreased by $13,500

10 Jan 22 Accounts Payable $13,500
Cash $13,500
24
 Transaction 11: On Jan 25, SCL pays $1,900 for monthly utility
costs.
 Effects:
 Expenses (Utilities Expense) increased by $1,900

11 Jan 25 Utilities Expense $1,900
Cash $1,900
25
 Transaction 12: On Jan 26, SCL pays $2,200 for monthly

advertising costs.
 Effects:
 Expenses (Advertising Expense) increased by $2,200

12 Jan 26 Advertising Expense $2,200
Cash $2,200
26
 Transaction 13: On Jan 28, SCL pays $2,900 in wages to its

employees for the month of January.
 Effects:
 Expenses (Wages Expense) increased by $2,900

13 Jan 28 Wages Expense $2,900
Cash $2,900
27
 Transaction 14: On Jan 31, dividends of $400 are declared.

 Effects:
 Assets (Cash) decreased by $400
 Shareholder’s Equity (Dividends declared) decreased by $400

14 Jan 31 Dividends Declared $400
Cash $400
AP3-5A Prepare Journal Entries
29
For each of the following transactions, prepare journal entries:

a. Inventory costing $3,100 was purchased on account.
b. A payment of $3,000 was made on accounts payable.
c. Inventory costing $1,800 was sold on account for $2,700. (Hint: Two journal entries are
required.)
d. Accounts receivable of $2,000 were collected.
e. Supplies costing $1,400 were purchased on account.
f. Supplies costing $500 were consumed during the period.
g. New equipment costing $7,500 was purchased for cash.
h. The company borrowed $12,000 from a bank.
i. The company issued common shares for $20,000.
j. Wages totalling $6,300 were earned by employees and paid to them.
k. The company paid $2,000 on its bank loan, which included $150 of interest.
l. The company paid $2,500 for the monthly rent on its leased premises.
m. Land costing $23,000 was purchased. The company paid $3,000 in cash and the
remainder was financed with a mortgage (a long-term loan).
Learning Objectives
43

ledger.
Accounting Cycle
44
Chart of Accounts
Opening balances
Closing entries Transactions or
events
Preparation of
financial statements Transaction analysis
Adjusted trial balance Journal entries
Adjusting entries Posting

Trial balance
Learning Objectives
45

LO4 – Explain the significance of a company’s decisions regarding its
chart of accounts and the implications of subsequent changes.
ledger.
Chart of Accounts
Financial transactions in the accounting cycle are

summarized in an account. The list of all of a
company’s accounts is known as the chart of accounts.
Copyright ©2018 John Wiley & Sons, 46

Inc.
Chart of Accounts
47
Many companies use four-digit account

numbers between 1000 and 1999 for assets,
2000-2999 for liabilities, 3000-3999 for
shareholders' equity, 4000-4999 for revenues,
5000-5999 for expenses, and so on.
Accounting Cycle
48
Chart of Accounts
Opening balances
events
Preparation of

Trial balance
AP3-13B
50
Evergreen Retail Company, whose fiscal year end is December 31, had the following
transactions in its first year of operations:
•1.Issued common shares for $65,000 cash on January 1, 2020.

•2.Borrowed $15,000 of additional financing from the bank on January 1, 2020.
•3.Bought equipment for $25,000 cash, also on January 1, 2020.
•4.Made $60,000 of inventory purchases on account.
•5.Had total sales of $92,000, of which $28,000 were on account. The cost of the
products sold was $44,000.
•6.Bought supplies for $800 cash.
•7.Collected payments of $24,000 from customers on their accounts.
•8.Paid suppliers $25,000 for the inventory that had been purchased on account.
•9.Paid employees $36,200.
•10.Paid the interest on the bank loan on December 31, 2020. The interest rate was
8%.
•11.Declared dividends of $2,000, which will be paid in 2021.
Prepare journal entries for transactions 1 through 11.

Learning Objectives
62

LO5 – Explain the difference between permanent and
temporary accounts.
LO6 – Record transactions in the general journal and general ledger.
Closing the Books
63
 Temporary accounts:
 Closed at year-end; reset to zero
 Only collect data for a single period
✓ Revenue, Expense, Dividends Declared
 Permanent accounts:
 Not closed
 Balances are carried forward
✓ Assets, Liabilities,
✓ Common Shares, Retained Earnings
Chart of Accounts
64
 Permanent Accounts
 Statement of Financial Position Accounts
◼ Assets ◼ Liabilities
◼ Cash
◼ Accounts Payable
◼ Accounts Receivable
◼ Interest Payable
◼ Inventory
◼ Bank Loan
◼ Prepaid Insurance
◼ Shareholders’ Equity
◼ Land
◼ Common Shares
◼ Equipment
◼ Retained Earnings
Chart of Accounts
65
 Temporary Accounts
 Statement of Income Accounts:
◼ Sales Revenues
◼ Cost of Goods Sold
◼ All Expense Accounts
⚫ Retained Earnings Statement Account:

o Dividends Declared
Learning Objectives
66

LO6 – Identify and record transactions in the general journal
and general ledger.
Accounting Cycle
67
Chart of Accounts
Opening balances
events
Preparation of

Trial balance
The Journal
68
 Where transactions are first recorded

 Every company has a general journal
 Records effect of a transaction in one place
 Provides a chronological record
 Helps prevent and locate errors
The General Ledger
69
 General ledger:
 One account for each specific asset, liability, equity,
revenue or expense account
 Arranged in financial statement order
1. Assets
2. Liabilities
3. Equity: Common Shares, Retained Earnings
4. Revenues
5. Expenses
 Posting: procedure of transferring journal entries

from the general journal to the ledger accounts

Recall Column Format and T-Account Format
70
Standard Form of General Ledger Account
71
Last week… Template Method
72
John Wiley & Sons Canada, Ltd. ©2014

SCL’s General Ledger Account for Cash
SCL’s Cash Account after the January Transactions Have Been Posted
Copyright ©2018 John Wiley & Sons, 73
Inc.
AP3-13-B – Post transactions
74
Post Journal Entries #1-11from the General Journal

to the General Ledger (represented by T accounts).
Example:
entry # 1
Trial Balance - SCL
78
 Final balance of
all GL Accounts
 In Chronological
Order
 DEBITS =
CREDITS
Learning Objectives
79

LO7 – Explain why adjusting entries are necessary and prepare
them.
Accounting Cycle
80
Chart of Accounts
Opening balances
events
Preparation of

Trial balance
Adjusting Entries
 Adjusting entries are made to adjust or update
accounts at the end of the accounting period
to ensure revenue and expense recognition
criteria are followed
 Required because the trial balance may not
contain complete and up-to-date data
 Some items are not recorded daily
 Some costs are not recorded during the
accounting period, as they expire due to the
passage of time
 Some items may be unrecorded
Accounting Cycle – Adjusting Entries
82
 There are two types of adjusting entries:
 Accrual Entries – are required when a revenue or

expense needs to be recognized before the cash is
received or paid
 Deferral Entries – are required when a revenue or

expense needs to be recorded after it has been
received or paid
Types of Adjusting Entries
Prepayments or Deferrals
Prepaid expenses
Unearned revenues
Accruals
Accrued expenses
Accrued revenues
Adjusting Entries
84
 Adjusting journal entries:

 Never involve cash
 Are made at the end of each accounting period
 Most common adjusting entries:

❑ Depreciation of capital assets;
❑ Expiration of prepaid expenses;
❑ Accrual of interest
❑ Consumption of supplies
Adjusting Entries
85
We’ve seen them before…
 Transaction 15: SCL’s accountant determined that the depreciation
on the equipment for January should be $850.
 Effects:
 Expenses (Depreciation expense) increased by $850
 Contra Asset (Accumulated depreciation) increased by $850

15 Jan Depreciation Expense $850
31
Accumulated Depreciation $850
Equipment
Adjusting Entries
86
 Transaction 16: SCL’s insurance expense for January must be
recognized.
 Effects:
 Expenses (Insurance expense) decreased by $150
 Assets (Prepaid insurance) decreased by $150

16 Jan Insurance Expense $150
31
Prepaid Insurance $150
Adjusting Entries
87
 Transaction 17: SCL recorded the interest on the bank loan for
the month. Interest on the company’s bank loan must be
accrued (recognized) for the month of January even though it
is not currently being paid
January interest = $100,000 x 6% x 1/12 = $500
 Effects:
 Expenses (Interest expense) increased by $500
 Liabilities (Interest payable) increased by $500
17 Jan Interest Expense $500
31
Interest Payable $500
AP13-B
89
Evergreen Retail Company, whose fiscal year end is December 31, had the
following transactions in its first year of operations:
12.The equipment purchased on January 1 has an estimated useful life of

eight years and an estimated residual value of $1,000 at the end of its life.
13.Supplies costing $200 were still on hand at the end of the year.
14.Wages in the amount of $800 were owed to employees at the end of the
year. These will be paid early in 2021.
b. Prepare adjusting journal entries for adjustments 12 to 14.

*Also update your General Ledger T-Accounts*
Adjusted Trial Balance
95
 Adjusted trial balance

 Prepared after adjusting entries
 This ensures:
Total debit balances = Total credit balances that
SCL
Worksheet
96
Accounting Cycle
99
 Financial statement preparation

 Statement of Income, Statement of Changes in
Shareholder Equity and Statement of Financial Position
 Instead of preparing from the template method balances,
prepare from your adjusted trial balance – same
procedure for preparing, just different format of balances
 Closing entries
 Balances in temporary accounts are transferred to
Retained Earnings
100
101
102
103
104
105
106
Learning Objectives
107
LO1 – Explain how the double-entry accounting system works, including how it
overcomes the limitations of the template approach.
LO5 – Explain the difference between permanent and
temporary accounts.
Closing Entries
108
Closing entries are required to transfer the balance in

temporary accounts to retained earnings. Temporary
accounts include: revenues, expenses and dividends.
The closing entries are as follows:

 Step 1: Close the revenue accounts to income summary.
 Step 2: Close all of the expense accounts to income summary.
 Step 3: Close the income summary account to retained

earnings.
 Step 4: Close dividend accounts directly to retained earnings.
Accounting Cycle
109
Chart of Accounts
Opening balances
events
Preparation of

Trial balance
Closing the Books
110
 Temporary accounts:
 Closed at year-end; reset to zero
 Only collect data for a single period
✓ Revenue, Expense, Dividends Declared
 Permanent accounts:
 Not closed
 Balances are carried forward
✓ Assets, Liabilities,
✓ Common Shares, Retained Earnings
Overview of Closing Entry Process
112
The Closing Process
Closing Entries
 AP3-13B
➢ Prepare closing entries
➢ Update your General
Ledger T-Accounts

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Understanding

LO1 – Explain how the double-entry accounting system works,

Assets (Left) = Liabilities + Equity (Right)

Replace with a “T” account

Assets Liabilities + Equity

Left (Debit) Right (Credit)

Each transaction impacts at least two accounts

Copyright John Wiley & Sons Canada, Ltd.

- cumbersome when large numbers of accounts and transactions

- significant limitation of the template method is the number of

- double-entry accounting system overcomes this limitation by

Cash (A) Accounts Payable (L) Common Shares (E)

Increases Decreases Decreases Increases

Ending balance Ending balance

LO1 – Explain how the double-entry accounting system works, including

 Transaction 1: On Jan 1, SCL issued 10,000 shares in exchange for

# Date Account Name Debit Credit

 Transaction 2: On Feb 1, SCL borrows $100,000 from the bank, this

# Date Account Name Debit Credit

 Transaction 3: On Jan 1, SCL rents a retail location for

# Date Account Name Debit Credit

 Transaction 4: On Jan 1, SCL paid $65,000 to purchase equipment.

# Date Account Name Debit Credit

 Transaction 5: SCL purchases a 1 year insurance policy for the new

# Date Account Name Debit Credit

 Transaction 6: On Jan 6, SCL purchased land for $180,000 cash.

# Date Account Name Debit Credit

 Transaction 7: On Jan 6, SCL purchase $23,000 of inventory on

# Date Account Name Debit Credit

 Transaction 8: On Jan 6, SCL sold product to customers for $34,000 of

# Date Account Name Debit Credit

# Date Account Name Debit Credit

 Transaction 9: On Jan 12, SCL received $11,000 from

# Date Account Name Debit Credit

 Transaction 10: On Jan 22, SCL makes payments of $13,500 on its

# Date Account Name Debit Credit

# Date Account Name Debit Credit

 Transaction 12: On Jan 26, SCL pays $2,200 for monthly

# Date Account Name Debit Credit

 Transaction 13: On Jan 28, SCL pays $2,900 in wages to its

# Date Account Name Debit Credit

 Transaction 14: On Jan 31, dividends of $400 are declared.

# Date Account Name Debit Credit

For each of the following transactions, prepare journal entries:

LO1 – Explain how the double-entry accounting system works, including

Adjusted trial balance Journal entries

Adjusting entries Posting

LO1 – Explain how the double-entry accounting system works, including

Financial transactions in the accounting cycle are

Copyright ©2018 John Wiley & Sons, 46

Many companies use four-digit account

Adjusted trial balance Journal entries

Adjusting entries Posting

•1.Issued common shares for $65,000 cash on January 1, 2020.

Prepare journal entries for transactions 1 through 11.

LO1 – Explain how the double-entry accounting system works, including

⚫ Retained Earnings Statement Account:

LO1 – Explain how the double-entry accounting system works, including

Adjusted trial balance Journal entries