CH02 Accounting Process

1
Chapter II
Summary of the Accounting process
2
3
2 The Accounting
Information System
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Understand basic accounting 6. Prepare financial statements from the

terminology. adjusted trial balance.
2. Explain double-entry rules. 7. Prepare closing entries.
3. Identify steps in the accounting cycle. 8. Prepare financial statements for a

merchandising company.
4. Record transactions in journals, post to ledger
accounts, and prepare a trial balance.
5. Explain the reasons for preparing adjusting
entries.
ACCOUNTING INFORMATION SYSTEM
4
Accounting Information System (AIS)
 Accounting system—A system to record, organize, summarize, and
report useful information to investors, creditors, and other external
financial statement users and the company’s managers for making
operating, investing, and financing decisions
 Collects and processes transaction data.
 Disseminates financial information to interested parties.
 Varies widely from business to business.
► Nature of business
► Type of transactions
► Size of business
► Volume of data
► Informational demands
5
Accounting Information System (AIS)

 Basic components of an accounting system include the
following:
• Accounting equation (the framework of the system)
• Source documents (used to generate accounting information)
• Records (used to organize and store accounting information)
• Outputs (the financial statements)

6
Helps management answer such questions as:

 How much and what kind of debt is outstanding?
 Were our sales higher this period than last?
 What assets do we have?
 What were our cash inflows and outflows?
 Did we make a profit last period?
 Are any of our product lines or divisions operating at a loss?
 Can we safely increase our dividends to shareholders?
 Is our rate of return on net assets increasing?
7
Basic Terminology
 Event  Journal
 Transaction  Posting
 Account  Trial Balance
 Real Account  Adjusting Entries
 Nominal Account  Financial Statements
 Ledger  Closing Entries
8
2 The Accounting
Information System
LEARNING OBJECTIVES
1. Understand basic accounting terminology. 6. Prepare financial statements from the

adjusted trial balance.
2. Explain double-entry rules.
7. Prepare closing entries.
3. Identify steps in the accounting cycle.
8. Prepare financial statements for a
entries.
Debits and Credits

 An account shows the effect of transactions on a given
asset, liability, equity, revenue, or expense account.
 Double-entry accounting system (two-sided effect).
 Recording done by debiting at least one account and
crediting another.
 DEBITS must equal CREDITS.
Debits and Credits
 An arrangement that shows the

Account
effect of transactions on an
account.
 Debit = “Left”
 Credit = “Right”
An Account can Account Name

be illustrated in a Debit / Dr. Credit / Cr.
T-Account form.
Debits and Credits
If the sum of Debit entries are greater than the sum of

Credit entries, the account will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000
Balance $15,000
Debits and Credits
If the sum of Credit entries are greater than the sum of

Debit entries, the account will have a credit balance.
Account Name
Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3
Balance $1,000
Debits and Credits Summary
Liabilities
Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance
Chapter
3-24
Assets Equity
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
Normal Balance Normal Balance
Chapter Chapter
3-23
Expense
3-25
Revenue
Normal Balance
Normal Balance
Chapter
Chapter 3-26
3-27
Debits and Credits Summary
Statement of Financial
Position Income Statement
Asset = Liability + Equity Revenue - Expense
Debit
Credit
The Accounting Equation
15
Relationship among the assets, liabilities and equity of a

business: ILLUSTRATION 2-3
Expanded Equation and
Debit/Credit Rules and Effects
The equation must be in balance after every transaction.

For every Debit there must be a Credit.
Double-Entry System Illustration
16
1. Owners invest $40,000 in exchange for ordinary

shares.
= +
Assets Liabilities
Liabilities Equity
Equity
+ 40,000 + 40,000
17
2. Disburse $600 cash for secretarial wages.
Assets
Assets = Liabilities
Liabilities + Equity
Equity
- 600 - 600
(expense)
18
3. Purchase office equipment priced at $5,200, giving a 10 percent

promissory note in exchange.
Assets
Equity
+ 5,200 + 5,200
19
4. Received $4,000 cash for services performed.
Assets
Equity
+ 4,000 + 4,000
(revenue)
20
5. Pay off a short-term liability of $7,000.
Assets
Equity
- 7,000 - 7,000
21
6. Declared a cash dividend of $5,000.
Assets
Equity
+ 5,000 - 5,000
22
7. Convert a non-current liability of $80,000 into ordinary shares.
Assets
Equity
- 80,000 + 80,000
23
8. Pay cash of $16,000 for a delivery van.
Assets
Equity
- 16,000
+ 16,000
Note
Notethat
thatthe
theaccounting
accountingequation
equationequality
equalityisis
maintained
maintainedafter
afterrecording
recordingeach
eachtransaction.
transaction.
Financial Statements and Ownership Structure
24
Ownership structure dictates the types of accounts that are

part of the equity section.
Proprietorship
Proprietorship or
or Corporation
Corporation
Partnership
Partnership
 Capital account  Share capital

 Drawing account  Share premium
 Dividends
 Retained Earnings
ILLUSTRATION 2-4
Financial Statements and
Ownership Structure
25
Investments by shareholders
Net income retained in the
business
Financial Statements
and Ownership Structure
Financial Statements and Ownership Structure
26
ILLUSTRATION 2-5
Effects of Transactions
on Equity Accounts
27
2 The Accounting
Information System
LEARNING OBJECTIVES

2. Explain double-entry rules. adjusted trial balance.
7. Prepare closing entries.
3. Identify steps in the accounting cycle.
entries.
THE ACCOUNTING CYCLE
ILLUSTRATION 2-6
Transactions
Transactions
Reversing
Reversing entries
entries Journalization
Journalization
Post-closing
Post-closing trail
trail balance
balance Posting
Posting
Closing
Closing Trial
Trial balance
balance
Work
Statement
Statement preparation
preparation Work
Sheet
Adjustments
Adjustments
Sheet
Adjusted
Adjusted trial
trial balance
balance
 Accounting Information Flows through the Accounting
System
30
Identifying and Recording Transactions and

Other Events
An item should be recognized in the financial statements if it
1. meets the definition of an element,
2. is probable that any future economic benefit

associated with the item will flow to or from the entity,
and
3. has a cost or value that can be measured reliably.

31
2 The Accounting
Information System
LEARNING OBJECTIVES

3. Identify steps in the accounting cycle. 7. Prepare closing entries.

4. Record transactions in journals, post to
ledger accounts, and prepare a trial
balance.
entries.
Journalizing
32
General Journal – a chronological list of transactions and other

events, expressed in terms of debits and credits to accounts.
Journal Entries are recorded in the journal.
September 1: Shareholders invested ₺15,000 cash in the

corporation in exchange for ordinary shares.
ILLUSTRATION 2-7
Posting
33
Posting – The process of transferring amounts from the

journal to the ledger accounts.
ILLUSTRATION 2-7
ILLUSTRATION 2-8
Advance slide in presentation mode to reveal answers.

ILLUSTRATION 2-8
Posting a Journal
34 Entry
Posting – Transferring amounts from journal to ledger.

Posting
35
An Expanded Example
The purpose of transaction analysis is
(1) to identify the type of account involved, and
(2) to determine whether a debit or a credit is required.
Keep in mind that every journal entry affects one or more of the
following items: assets, liabilities, equity, revenues, or expense.
Posting
36
1. October 1: Shareholders invest ₺100,000 cash in an

advertising venture to be known as Pioneer Advertising
Agency Inc.
ILLUSTRATION 2-9
Oct. 1 Cash 100,000

Share Capital—Ordinary 100,000
Cash Share Capital—Ordinary

Debit Credit Debit Credit
100,000 100,000
Posting
37
2. October 1: Pioneer purchases office equipment costing

₺50,000 by signing a 3-month, 12%, ₺50,000 note payable .
ILLUSTRATION 2-10
Oct. 1 Equipment 50,000

Notes payable 50,000
Equipment Notes Payable

50,000 50,000
Posting
38
3. October 2: Pioneer receives a ₺12,000 cash advance from

KC, a client, for advertising services that are expected to be
completed by December 31.
ILLUSTRATION 2-11
Oct. 2 Cash 12,000

Unearned Service Revenue 12,000
Cash Unearned Service Revenue

100,000 12,000
12,000
Posting
39
4. October 3: Pioneer pays ₺9,000 office rent, in cash, for

October.
ILLUSTRATION 2-12
Oct. 3 Rent Expense 9,000

Cash 9,000
Cash Rent Expense

100,000 9,000 9,000
12,000
Posting
40
5. October 4: Pioneer pays ₺6,000 for a one-year insurance

policy that will expire next year on September 30.
ILLUSTRATION 2-13
Oct. 4 Prepaid Insurance 6,000

Cash 6,000
Cash Prepaid Insurance

100,000 9,000 6,000
12,000 6,000
Posting
41
6. October 5: Pioneer purchases, for ₺25,000 on account, an

estimated 3-month supply of advertising materials from
Aero Supply.
ILLUSTRATION 2-14
Oct. 5 Supplies 25,000

Accounts Payable 25,000
Supplies Accounts Payable

25,000 25,000
Posting
42
7. October 9: Pioneer signs a contract with a local newspaper

for advertising inserts (flyers) to be distributed starting the
last Sunday in November. Pioneer will start work on the
content of the flyers in November. Payment of ₺7,000 is due
following delivery of the Sunday papers containing the
flyers.
ILLUSTRATION 2-15
A business transaction has not occurred. There is only an

agreement between Pioneer Advertising and the newspaper for
the services to be provided in November. Therefore, no journal
entry is necessary in October.
Posting
43
8. October 20: Pioneer’s board of directors declares and pays

a ₺5,000 cash dividend to shareholders.
ILLUSTRATION 2-16
Oct. 20 Dividends 5,000
Cash 5,000
Cash Dividends
100,000 9,000 5,000
12,000 6,000
5,000
Posting
44
9. October 26: Employees are paid every four weeks. The

total payroll is ₺2,000 per day. The pay period ended on
Friday, October 26, with salaries of ₺40,000 being paid.
ILLUSTRATION 2-17
Oct. 26 Salaries and Wages Expense 40,000
Cash 40,000
Cash Salaries and Wages Expense

100,000 9,000 40,000
12,000 6,000
5,000
40,000
Posting
45
10. October 31: Pioneer receives ₺28,000 in cash and bills
Copa Company ₺72,000 for advertising services of
₺100,000 provided in October. ILLUSTRATION 2-18
Oct. 31 Cash 28,000

Accounts Receivable 72,000
Service Revenue 100,000
Cash Accounts Receivable Service Revenue

Debit Credit Debit Credit Debit Credit
100,000 9,000 72,000 100,000
12,000 6,000
28,000 5,000
40,000
80,000
Trial Balance
46
A Trial Balance
 List of each account and its balance in the order in
which they appear in the ledger.
 Debit balances listed in the left column and credit
balance in the right column.
 Used to prove the mathematical equality of debit and
credit balances.
 Uncovers errors in journalizing and posting.
Trial Balance
47
 Reasons columns may not balance:
• An error in adding columns
• An account balance listed in the wrong column
• A transposition or slide (divisible by 9)
 Balanced debit and credit columns do not automatically ensure that the
accounting information is error-free:
• An entire transaction may not have been recorded or may have
been accidentally recorded twice.
• An entire transaction may not have been posted to the accounts
or may have been posted twice.
• Equal dollar amounts of debits and credits, but the wrong
amounts, may have been recorded for a transaction.
• A journal entry may have recorded a transaction using a wrong
account.
• A journal entry may have been posted to a wrong account.
48 ILLUSTRATION 2-19
49
2 The Accounting
Information System
LEARNING OBJECTIVES

4. Record transactions in journals, post to ledger 8. Prepare financial statements for a

accounts, and prepare a trial balance. merchandising company.
5. Explain the reasons for preparing

adjusting entries.
Adjusting Entries
Makes it possible to:

 Report on the statement of financial position the
appropriate assets, liabilities, and equity at the statement
date.
 Report on the income statement the proper revenues
and expenses for the period.
► Revenues are recorded in the period in which services
are performed.
► Expenses are recognized in the period in which they are
incurred.
Adjusting Entries
Types of Adjusting Entries ILLUSTRATION 2-

20
Deferrals Accruals
1. Prepaid Expenses. 3. Accrued Revenues.

Expenses paid in cash Revenues for services
before they are used or performed but not yet
consumed. received in cash or
recorded.
2. Unearned Revenues. 4. Accrued Expenses.
Cash received before Expenses incurred but not
services are performed. yet paid in cash or
recorded.
Adjusting Entries for Deferrals
Deferrals are expenses or revenues that are recognized at a date

later than the point when cash was originally exchanged.
Two types of deferrals

 Prepaid expenses
 Unearned revenues
If a company does not make an adjustment for these deferrals,
 the asset and liability are overstated, and
 the related expense and revenue are understated.

ILLUSTRATION 2-21 Adjusting Entries for Deferrals
Adjusting Entries for Prepaid Expenses
Prepaid Expenses. Assets paid for and recorded before a

company uses them.
Cash Payment BEFORE Expense Recorded
Prepayments often occur in regard to:

 Insurance  Rent
 Supplies  Buildings and equipment
 Advertising
55
Supplies. Pioneer purchased advertising supplies costing

₺25,000 on October 5. Prepare the journal entry to record the
purchase of the supplies.
Oct. 5 Supplies 25,000

Cash 25,000
Supplies Cash
25,000 25,000
56
Supplies. An inventory count at the close of business on

October 31 reveals that ₺10,000 of supplies are still on hand.
Oct. 31 Supplies Expense 15,000

Supplies 15,000
Supplies Supplies Expense

25,000 15,000 15,000
10,000
Adjusting Entries for
Prepaid Expenses
Statement
Presentation:
Supplies identifies that
portion of the asset’s
cost that will provide
future economic benefit.
ILLUSTRATION 2-35
Statement
Presentation:
Supplies expense
shows a balance of
₺15,000, which
equals the cost of
supplies used in
October
ILLUSTRATION 2-35
59
Insurance. On Oct. 4th, Pioneer paid ₺6,000 for a one-year fire

insurance policy, beginning October 1. Show the entry to
record the purchase of the insurance.
Oct. 4 Prepaid Insurance 6,000
Cash 6,000
Prepaid Insurance Cash

6,000 6,000
60
Insurance. An analysis of the policy reveals that ₺500 ( ₺6,000

÷ 12) of insurance expires each month. Thus, Pioneer makes
the following adjusting entry.
Oct. 31 Insurance Expense 500
Prepaid Insurance 500
Prepaid Insurance Insurance Expense

6,000 500 500
5,500
61
Prepaid Expenses
Statement
Presentation:
Prepaid Insurance
represents the
unexpired cost for
the remaining 11
months of
coverage.
ILLUSTRATION 2-35
62
Statement
Presentation:
Insurance
expense identifies
that portion of the
asset’s cost that
expired in
October.
ILLUSTRATION 2-35
63
Depreciation. Pioneer estimates depreciation on its office

equipment to be ₺400 per month. Pioneer recognizes
depreciation for October by the following adjusting entry.
Oct. 31 Depreciation Expense 400

Accumulated Depreciation 400
Depreciation Expense Accumulated Depreciation

400 400
64
Prepaid Expenses
Statement
Presentation:
Accumulated
Depreciation—is a
contra asset
account.
ILLUSTRATION 2-35
65
Statement
Presentation:
Depreciation
expense identifies
that portion of the
asset’s cost that
expired in
October.
ILLUSTRATION 2-35
Adjusting Entries for Unearned Revenues
Receipt of cash before the services are performed is recorded

as a liability called unearned revenues.
Cash Receipt BEFORE Revenue Recorded
Unearned revenues often occur in regard to:
 Rent  Magazine subscriptions

 Airline tickets  Customer deposits
 Tuition
67
Unearned Revenue. Pioneer received ₺12,000 on October 2

from KC for advertising services expected to be completed by
December 31. Show the journal entry to record the receipt on
Oct. 2nd.
Oct. 2 Cash 12,000

Unearned Service Revenue 12,000
Cash Unearned Service Revenue

12,000 12,000
68
Unearned Revenues. An evaluation of the service Pioneer

performed for Knox during October, the company determines
that it should recognize 4,000 of revenue in October.
Oct. 31 Unearned Service Revenue 4,000

Service Revenue Unearned Service Revenue

100,000 4,000 12,000
4,000
8,000
69
Unearned Revenues
Statement
Presentation:
Unearned service
revenue represents the
remaining advertising
services expected to be
performed in the future.
ILLUSTRATION 2-35
70
Statement
Presentation:
Service revenue
shows total revenue
recognized in
October.
ILLUSTRATION 2-35
Adjusting Entries for Accruals
Accruals are made to record

 revenues for services performed and
 expenses incurred in the current accounting period.
Without an accrual adjustment, the
 revenue account (and the related asset account) or the
 expense account (and the related liability account) are

understated.
ILLUSTRATION 2-27 Adjusting Entries for Accruals
Adjusting Entries for Accrued Revenues
Revenues recorded for services performed for which cash has

yet to be received at statement date are accrued revenues.
Adjusting entry results in:
Revenue Recorded BEFORE Cash Receipt
Accrued revenues often occur in regard to:

 Rent
 Interest
 Services performed
Adjusting Entries for Accrued Revenues
74
Accrued Revenues. In October Pioneer performed services

worth ₺2,000 that were not billed to clients on or before
October 31. Pioneer makes the following adjusting entry.
Oct. 31 Accounts Receivable 2,000

Accounts Receivable Service Revenue

72,000 100,000
2,000 4,000
2,000
74,000 106,000
ILLUSTRATION 2-35
Adjusting Entries
75
for Accrued
Revenues
ILLUSTRATION 2-35
Statement Presentation
Adjusting Entries for Accrued Expenses
Expenses incurred but not yet paid in cash or recorded.
Adjusting entry results in:
Expense Recorded BEFORE Cash Payment
Accrued expenses often occur in regard to:
 Rent  Taxes
 Interest  Salaries
77
Accrued Interest. Pioneer signed a three-month, 12%, note

payable in the amount of ₺50,000 on October 1. The note
requires interest at an annual rate of 12 percent. Three factors
determine the amount of the interest accumulation:
ILLUSTRATION 2-29
Formula for Computing
1 2 3 Interest
78
Accrued Interest. Pioneer signed a three-month, 12%, note

payable in the amount of ₺50,000 on October 1. Prepare the
adjusting entry on Oct. 31 to record the accrual of interest.
Oct. 31 Interest Expense 500
Interest Payable 500
Interest Expense Interest Payable

500 500
ILLUSTRATION 2-35
Adjusting Entries
79
for Accrued
Expenses
ILLUSTRATION 2-35
80
Accrued Salaries. At October 31, the salaries and wages for

these days represent an accrued expense and a related liability to
Pioneer. The employees receive total salaries of ₺10,000 for a
five-day work week, or ₺2,000 per day.
81
Accrued Salaries. Employees receive total salaries of ₺10,000

for a five-day work week, or ₺2,000 per day. Prepare the
adjusting entry on Oct. 31 to record accrual for salaries.
Oct. 31 Salaries and Wages Expense 6,000

Salaries and Wages Payable 6,000
Salaries and Wages Expense Salaries and Wages Payable

40,000 6,000
6,000
46,000
ILLUSTRATION 2-35
Adjusting Entries
82
for Accrued
Expenses
ILLUSTRATION 2-35
83
Accrued Salaries. On November 23, Pioneer will again pay total

salaries of ₺40,000. Prepare the entry to record the payment of
salaries on November 23.
Nov. 23 Salaries and Wages Payable 6,000
Salaries and Wages Expense 34,000
Cash 40,000
Salaries and Wages Expense Salaries and Wages Payable

34,000 6,000 6,000
84
Bad Debts. Assume Pioneer reasonably estimates a bad debt

expense for the month of ₺1,600. It makes the adjusting entry for
bad debts as follows.
Oct. 31 Bad Debt Expense 1,600
Allowance for Doubtful Accounts 1,600
ILLUSTRATION 2-32
Adjustment for Bad Debt
Expense
ILLUSTRATION 2-35
Adjusting Entries
85
for Accrued
Expenses
ILLUSTRATION 2-35
Adjusted
86
Trial
Balance
Shows the balance
of all accounts,
after adjusting
entries, at the end
of the accounting
period.
Proves the equality
of the total debit
and credit balances
ILLUSTRATION 2-33
87
2 The Accounting
Information System
LEARNING OBJECTIVES

entries.
Preparing Financial Statements
88
Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
from the
the
Adjusted
AdjustedTrial
TrialBalance.
Balance.
Retained Statement of
Income
Earnings Financial
Statement
Statement Position
89
ILLUSTRATION 2-34 Preparation of the Income

Statement and Retained Earnings Statement from
the Adjusted Trial Balance
90
ILLUSTRATION 2-35
Preparation of the Statement of Financial Position from the Adjusted Trial Balance
WHAT’S
24/7 ACCOUNTING
YOUR PRINCIPLE
To achieve the vision of “24/7 accounting,” a company must be able to

update revenue, income, and statement of financial position numbers
every day within the quarter (and potentially publish them on the
Internet). Such real-time reporting responds to the demand for more
timely financial information made available to all investors—not just to
analysts with access to company management.
Two obstacles typically stand in the way of 24/7 accounting:

having the necessary accounting systems to close the books on a
daily basis, and reliability concerns associated with unaudited real-
time data. Only a few companies have the necessary accounting
capabilities.
92
2 The Accounting
Information System
LEARNING OBJECTIVES



entries.
Closing Entries
Basic Process
 Reduce the balance of nominal (temporary) accounts to zero
in preparation for the next period’s transactions.
 Transfer all revenue and expense account balances (income
statement accounts) to Retained Earnings.
 Statement of financial position (asset, liability, and equity)
accounts are not closed.
 Dividends are closed directly to Retained Earnings.
 Income Summary account may be used however it has no
effect on the financial statements.
Closing Entries
ILLUSTRATION 2-33
Closing Journal Entries:
Retained Earnings 5,000

Dividends 5,000
Salaries & Wages Expense
46,000
Supplies Expense
15,000
Rent Expense 9,000
Insurance Expense 500
Interest Expense 500
Depreciation Expense
400
Bad Debt Expense 1,600
Retained Earnings
33,000
ILLUSTRATION 2-
38
ILLUSTRATION 2-38
Accounting Cycle Summarized
1. Enter the transactions of the period in appropriate journals.

2. Post from the journals to the ledger (or ledgers).
3. Prepare an unadjusted trial balance (trial balance).
4. Prepare adjusting journal entries and post to the ledger(s).
5. Prepare a trial balance after adjusting (adjusted trial balance).
6. Prepare the financial statements from the adjusted trial balance.
7. Prepare closing journal entries and post to the ledger(s).
8. Prepare a trial balance after closing (post-closing trial balance).
9. Prepare reversing entries (optional) and post to the ledger(s).
Reversing entries are

covered in Appendix 3B.
97
2 The Accounting
Information System
LEARNING OBJECTIVES


entries.
ILLUSTRATION 2-39
98
Merchandising
Company
Financial Statements of a Merchandising Company
99
ILLUSTRATION 2-40
Financial
100 Statements of a
Merchandising
Company
ILLUSTRATION 2-41
APPENDIX 2B USING REVERSING ENTRIES
ILLUSTRATION OF REVERSING ENTRIES-ACCRUALS

ILLUSTRATION 2B-1
ILLUSTRATION OF REVERSING ENTRIES-DEFERRALS

ILLUSTRATION 2B-2
SUMMARY OF REVERSING ENTRIES

1. All accruals should be reversed.
2. All deferrals for which a company debited or credited the original
cash transaction to an expense or revenue account should be
reversed.
3. Adjusting entries for depreciation and bad debts are not
reversed.
Reversing entries do not have to be used.
USING A WORKSHEET: THE ACCOUNTING
APPENDIX 2C
CYCLE REVISITED
A company prepares a worksheet either on

 columnar paper or
 within a computer spreadsheet.
A company uses the worksheet to adjust

 account balances and
 to prepare financial statements.
APPENDIX 2C
CYCLE REVISITED
WORKSHEET COLUMNS
 Trial Balance Columns
 Adjustment Columns
APPENDIX 2C
CYCLE REVISITED
ILLUSTRATION 2C-1 (Partial)

Use of a Worksheet
APPENDIX 2C
USING A
WORKSHEET: THE
ACCOUNTING
CYCLE REVISITED
ILLUSTRATION 2C-1
Use of a Worksheet
APPENDIX 2C
CYCLE REVISITED
PREPARING FINANCIAL STATEMENTS FROM A

WORKSHEET
The Worksheet:
 provides information needed for preparation of the
financial statements.
 Sorts data into appropriate columns, which facilitates the
preparation of the statements.
ILLUSTRATION 2-39
109
110
ILLUSTRATION 2-40
ILLUSTRATION
2-41
111
Worksheet for Manufacturing
112
Business
 Example
The following unadjusted trial balance was prepared from the ledger of Bravo Manufacturing
Corporation on December 31, 20X1. The company used reversing entries on January 1 of each
year to reverse accrued wages and accrued interest payable.
113
114
Worksheet for Manufacturing
115
Business…

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CH02 Accounting Process

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1. Understand basic accounting 6. Prepare financial statements from the

2. Explain double-entry rules. 7. Prepare closing entries.

3. Identify steps in the accounting cycle. 8. Prepare financial statements for a

Accounting Information System (AIS)

• Source documents (used to generate accounting information)

• Records (used to organize and store accounting information)

• Outputs (the financial statements)

Helps management answer such questions as:

1. Understand basic accounting terminology. 6. Prepare financial statements from the

Debits and Credits

 An arrangement that shows the

An Account can Account Name

If the sum of Debit entries are greater than the sum of

Transaction #1 $10,000 $3,000 Transaction #2

If the sum of Credit entries are greater than the sum of

Transaction #1 $10,000 $3,000 Transaction #2

Normal Balance Normal Balance

Asset = Liability + Equity Revenue - Expense

Relationship among the assets, liabilities and equity of a

The equation must be in balance after every transaction.

1. Owners invest $40,000 in exchange for ordinary

2. Disburse $600 cash for secretarial wages.

3. Purchase office equipment priced at $5,200, giving a 10 percent

4. Received $4,000 cash for services performed.

5. Pay off a short-term liability of $7,000.

6. Declared a cash dividend of $5,000.

7. Convert a non-current liability of $80,000 into ordinary shares.

8. Pay cash of $16,000 for a delivery van.

Ownership structure dictates the types of accounts that are

 Capital account  Share capital

1. Understand basic accounting terminology. 6. Prepare financial statements from the

Identifying and Recording Transactions and

1. meets the definition of an element,

2. is probable that any future economic benefit

3. has a cost or value that can be measured reliably.

1. Understand basic accounting terminology. 6. Prepare financial statements from the

3. Identify steps in the accounting cycle. 7. Prepare closing entries.

General Journal – a chronological list of transactions and other

September 1: Shareholders invested ₺15,000 cash in the

Posting – The process of transferring amounts from the

Advance slide in presentation mode to reveal answers.

Posting – Transferring amounts from journal to ledger.

1. October 1: Shareholders invest ₺100,000 cash in an

Oct. 1 Cash 100,000

Cash Share Capital—Ordinary

2. October 1: Pioneer purchases office equipment costing

Oct. 1 Equipment 50,000

Equipment Notes Payable

3. October 2: Pioneer receives a ₺12,000 cash advance from

Oct. 2 Cash 12,000

Cash Unearned Service Revenue

4. October 3: Pioneer pays ₺9,000 office rent, in cash, for

Oct. 3 Rent Expense 9,000

Cash Rent Expense

5. October 4: Pioneer pays ₺6,000 for a one-year insurance

Oct. 4 Prepaid Insurance 6,000

Cash Prepaid Insurance

6. October 5: Pioneer purchases, for ₺25,000 on account, an

Oct. 5 Supplies 25,000