SUA-Overview of the Accounting System Financial Statements Nature of Transactions

SUA-Overview of the Accounting System • Financial Statements SUA-OiOverview o fthf the • Nature of Transactions Accounting System • Steps in the Accounting Process • Post-Closing Trial Balance • Relationships Among Financial Statements, Trilial Ba lances, Le dgers, Journals, Documents, and Transactions • Internal Controls 1 2 Statement Financial Statementsof R/E Nature of Transactions Balance Sheet - Beginning of the period Capital Retained Assets Liabilities Exchanges between business firms, for example: =++Stock Earnings – Sale to a customer, – Purchase of goods, Income Statement – Payment or receipt of cash Net Adjustments to accounts, for example: Revenues+ Expenses = Income (Loss) – Recording of accrued salaries, – Depreciation expense, mmm... it looks like – Adjustments to prepaid accounts these are fairly stated (Dividends) according to GAAP. + Identify the Post the Assign Record the exchanges Determine transactions, Balance Sheet - End of the period proper transactions or which summarize values to in the adjustments Accounts into the Capital Retained the correct time Assets Liabilities that must be are effected financial =++Stock Earnings transactions period recorded statements 3 4 1 Steps in the Accounting Process Steps in the Accounting Process 1. Recorded in 1. Transactions occur, Prepare documents, 1. Documents Journals Record in journals Prepared 2. Posted to 2. Post to ledgers Ledgers 1. Transactions 3. Prepare Trial Balance Occur 4. Adjusting entries 3. Unadjusted NEW YEAR Gen. Ledger 5. Prepare adjusted Trial Balance Trial Balance 6. Financial Statements 7. Closing Entries Made 7. Closing entries 4. Adjusting Entries 8. Prepare post-closing Trial Balance (Optional) Prepared and 6. Financial Posted Statements 5. Adjusted Prepared Trial Balance Prepared 5 6 Four Major Cycles of Business Operations Transactions Occur Expenditure ClCycle While a Business Goes Through Four Major Cycles Financial Conversion Cycle Cycle Revenue Cycle 7 8 2 Prepare documents Documents Prepared • Purchase order Before the At the After the • Bill of lading – A document evidencing the receipt of goods for shipment, issued by a person engaged in the business of transporting or forwarding goods. transaction same time transaction • Sales invoice • Checks • Bank deposit request Internally Purchase Receiving Sales • Sales return request • Credit memo Prepared order Report Invoice – Issued by a Seller to a Buyer, indicating the products, quantities and agreed prices for products or services that the Seller provided the Buyer with, but Buyer returned. Customer Externally Shipping Vendor’s purchase Prepared Document Invoice order 9 10 Record in Journals Post to Ledgers General Ledger Every transaction during an Typical Journals: – The number and description of general ledger accounting period is recorded – Sales Journal, accounts deppgend on the needs of the management and in a journal – Cash Receipts Journal, all account titles for a company are included in the Debits and credits for each chart of accounts. – Purchases Journal, transaction must be equal – All transactions must be posted from the journals to – Cash disbursements Use of special journals the general ledger before financial statements are reduces the recording costs journal, prepared. and facilitates the search – Payroll journal, – When specialized journals are used, some similar process – General journal. transactions are ggyrouped and only the total amount is The number and titles of posted to the general ledger. special journals will depend – It includes the accumulated total of all transactions, on the accounting since the inception of the company. information needs and system design preferences of management 11 12 3 Post to Ledgers Post to Ledgers • General Ledger contains ALL, in detail or summary ftformat • Sub ledgers are posted in summary to • Sub ledgers (optional) to hold numerous the General Ledger account transactions for same type: • They MUST AGREE! Accounts receivable, by customer Accounts payable, by supplier Employee earnings, by employee Fixed Assets, by asset 13 14 Unadjusted General Ledger Post to Ledgers Trial Balance Subsidiary Ledgers Typical Subsidiary Ledgers: – Used to handle List of all gggeneral ledger accounts de ta ile d inf ormati on – Accounts receivable, for a general ledger – Accounts payable, Prepared as an aid in preparing account. – Delivery equipment, adjusting entries – Depreciation expense, – Agrees in total to the Before an unadjusted trial balance is corresponding general – Accumulated depreciation, prepared, all the transactions, other than ledger account. – Common stock, adjjgusting entries, must be recorded in – Same amounts are – Inventory the journals and posted to the ledgers posted to both subsidiary and general ledgers. 15 16 4 Six General Types Prepare and Post Adjusting Entries of Adjusting Entries (AJEs) Prepared at the end of the period before the 1. Prepaid expense 4. Unearned revenue Amount that has been Represents money that preparation of the financial statements paid in a dvance of th e you hidihave received in Every adjusting entry effects both the balance sheet item received or the advance of providing benefit derived the goods or services to and the income statement your customer. 2. Accrued expense Recorded as a liability. Total debits = total credits for each adjusting entry An expense incurred during an accounting 5. Estimated items Recorded in the general journal period for which E.g., depreciation, payment is not due until amortization Each prepared separately a later accounting 6. Inventory adjustment Posted individually to the proper ledger account period. The difference between 3. Accrued revenue Most adjusting entries are not posted to subsidiary the ending inventory Revenue earned but not amount and the booked ledgers yet collected. Recorded amount. as an asset – Accts. Rec. 17 18 Worksheet Prepare Financial Statements Unadjusted Adjusted Trial Income Account Adjustments Balance Sheet Trial Balance Balance Statement Income statement, retained earnings statement, balance sheet, and cash flow statement Descriptions and details must be stated according to GAAP Similar account balances are summarized in to summary accounts Accounts are grouped, current and non-current, operating and non-operating, etc. Footnotes and other required disclosures made Income Summary - Net Income (Loss) 19 20 5 Closing Entries Made Closing Entries At the end of each accounting year, all nominal accounts are closed. Complete the accounting process for the current period, We d’don’t necessari llly close t he accounts every time we prepare the financial statements, only at the Prepared after all the adjustments are recorded in the year end. journals and posted to the ledger. All nominal accounts must be closed out, so that the Nominal accounts are: company starts a new year with zero balance in those – Revenue accounts, closed to Income Summary accounts. – Expense accounts, closed to Income Summary – Income Summary Account, closed to R/E Each closing entry must be recorded in the general – Dividend Account, closed to R/E journal and individually posted to the appropriate – Drawing accounts in partnerships and sole general ledger account. proprietorships, closed to the partner’s Capital Account 21 22 Post Closing Trial Balance 1. Post in the General Journal 2. Then post in the General Ledger 3. Start new year with zero in these 3 accounts (not Retained Earnings) 23 6.

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