1.

2 The Accounting
Cycle

Slide
2-1
 The Account

Record of increases and decreases in

Account a specific asset, liability, equity,
revenue, or expense item.
Debit = “Left”
Credit = “Right”

An Account can Account Name

be illustrated in a Debit / Dr. Credit / Cr.
T-Account form.

Slide
2-2
 The Account

Debits and Credits

Double-entry accounting system
Each transaction must affect two or more
accounts to keep the basic accounting equation
in balance.
Recording done by debiting at least one
account and crediting another.
DEBITS must equal CREDITS.

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2-3
 Debits and Credits

If Debits are greater than Credits, 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

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2-4
 Debits and Credits

If Credits are greater than Debits, the account will

have a credit balance.

Account Name
Debit / Dr. Credit / Cr.

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

8,000 Transaction #3

Balance $1,000

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2-5
 Debits and Credits Summary
Liabilities

Normal
Credit / Cr.
Normal
Debit / Dr.

Balance Balance
Debit Credit Normal Balance

Assets Chapter

Equity
3-24

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter

Expense
3-23

Revenue
Chapter
3-25

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

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2-6
 Debits and Credits Summary

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit

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2-7
 Assets and Liabilities

Assets
Debit / Dr. Credit / Cr.
Assets - Debits should
exceed credits.
Normal Balance

Chapter
3-23
Liabilities – Credits
should exceed debits.
Liabilities
Debit / Dr. Credit / Cr.
The normal balance is
on the increase side.
Normal Balance

Chapter
3-24

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2-8
 Equity Relationships

Equity Issuance of share capital and

Debit / Dr. Credit / Cr.
revenues increase equity
(credit).
Normal Balance
Dividends and expenses
Chapter
3-25 decrease equity (debit).

Share Capital Retained Earnings Dividends

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

3-25 3-25 3-23

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2-9
 Revenue and Expense

Revenue The purpose of earning

revenues is to benefit the
Debit / Dr. Credit / Cr.

shareholders.
The effect of debits and credits
Normal Balance

Chapter
3-26
on revenue accounts is the
same as their effect on equity.
Expense
Debit / Dr. Credit / Cr. Expenses have the opposite
effect: expenses decrease
equity.
Normal Balance

Chapter
3-27

Slide
2-10
 Summary of Debit/Credit Rules

Relationship among the assets, liabilities and

equity of a business:

The equation must be in balance after every transaction.

For every Debit there must be a Credit.

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2-11
 Steps in the Recording Process

Transfer journal information to

Analyze each transaction Enter transaction in a journal ledger accounts

Business documents, such as a sales slip, a check, a bill,

or a cash register tape, provide evidence of the
transaction.

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2-12
 Steps in the Recording Process

Journalizing
Book of original entry.

Transactions recorded in chronological order.

Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit

and credit amounts can be easily compared.
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2-13
 Steps in the Recording Process

Journalizing - Entering transaction data in the journal.

Illustration: On September 1, stockholders invested $15,000
cash in exchange for ordinary shares, and Softbyte
purchased computer equipment for $7,000 cash.

General Journal
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
Share capital 15,000

Computer 7,000
equipment
Cash 7,000
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2-14
 Steps in the Recording Process

Simple and Compound Entries

Illustration: On July 1, Butler Company purchases a
delivery truck costing $14,000. It pays $8,000 cash now
and agrees to pay the remaining $6,000 on account.

General Journal
Date Account Title Ref. Debit Credit
Sept. 1 Delivery equipment 14,000
Cash 8,000
Accounts 6,000
payable

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2-15
 Steps in the Recording Process

The Ledger
General Ledger
 All accounts maintained by a company.
 All asset, liability, equity, revenue and expense
accounts.

Slide
2-16
 The Ledger

Standard Form of Account

 T-account form used in accounting textbooks.
 Ledger form used in practice.

Slide
2-17
 The Ledger

Chart of Accounts

Slide
2-18
 Posting

Posting – the
process of
transferring
amounts
from the
journal to the
ledger
accounts.

Slide
2-19
 The Recording Process 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.

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2-20
 The Recording Process Illustrated

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2-21
 The Recording Process Illustrated

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2-22
 The Recording Process Illustrated

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2-23
 The Recording Process Illustrated

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2-24
 The Recording Process Illustrated

Slide
2-25
 The Recording Process Illustrated

Slide
2-26
 The Recording Process Illustrated

Slide
2-27
 The Recording Process Illustrated

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2-28
 The Recording Process Illustrated

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2-29
 The Recording Process Illustrated
Katherine Turner recorded the following
transactions during the month of March.

Post these entries to the Cash account.

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2-30
 The Trial Balance

A list of accounts
and their
balances at a
given time.

Purpose is to
prove that debits
equal credits.

Slide
2-31
 The Trial Balance

Limitations of a Trial Balance

The trial balance may balance even when
1. a transaction is not journalized,
2. a correct journal entry is not posted,
3. a journal entry is posted twice,
4. incorrect accounts are used in journalizing or
posting, or
5. offsetting errors are made in recording the amount
of a transaction.

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2-32
 The Trial Balance

The accounts
come from the
ledger of Christel Corporation
Trial Balance (in
Christel thousands)
December 31, 2011
Corporation at
December 31,
2011.

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