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Chapter 3

3-2

Accounting CycleAccounting 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.

3-3

Accounting Cycle StepsAccounting Cycle Steps

3-4

The LedgerThe Ledger

The entire group of accounts is kept

together in an accounting record

called a ledger.

Cash

Accounts Payable

Capital Stock

Accounts are individual records showing increases

and decreases.

3-5

The Use of AccountsThe Use of Accounts

Increases are recorded on one

side of the T account, and decreases are

recorded on the other side.

Left or

Debit Side

Right or

Credit Side

Title of Account

3-6

Cash5/1 8,000 5/2 2,500

5/25 75 5/8 2,0005/29 750 5/28 150

5/31 50 5/31 4,125Bal.

Receipts are on the debit

side.

Payments are on the credit

side.

The balance is the difference between the debit and credit entries

in the account.

Debit and Credit EntriesDebit and Credit Entries

3-7

Balance of T AccountBalance of T AccountDebit BalanceCredit BalanceAny Asset AccountAny Liabilities and owner’s Equity

AccountsDouble Entry Accounting- the

equality of debits and credits

3-8

AA = LL + OEOEASSETSASSETS

Debit for

Increase

Credit for

Decrease

EQUITIESEQUITIES

Debit for

Decrease

Credit for

Increase

LIABILITIESLIABILITIES

Debit for

Decrease

Credit for

Increase

Debits and credits affect accounts as follows:

Debit and Credit EntriesDebit and Credit Entries

3-9

In an actual accounting system, transactions are initially recorded in the

journal.

GENERAL JOURNAL

Date Account Titles and ExplanationPR Debit Credit

2009May 1 Cash 8,000

Capital Stock 8,000Owners invest cash in the business.

The JournalThe Journal

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Posting Journal Entries to Posting Journal Entries to the Ledger Accountsthe Ledger Accounts

Posting simply means updating the ledger accounts for

the effects of the transactions

recorded in the journal.

3-11

GENERAL JOURNAL

Date Account Titles and ExplanationPR Debit Credit

2009May 1 Cash 8,000

Capital Stock 8,000Owners invest cash in the business.General Ledger

CashDate Debit Credit Balance2009

May 1 8,000 8,000

Posting Journal Entries to Posting Journal Entries to the Ledger Accountsthe Ledger Accounts

3-12

GENERAL JOURNAL

Date Account Titles and ExplanationPR Debit Credit

2009May 1 Cash 8,000

Capital Stock 8,000Owners invest cash in the business.General Ledger

Capital StockDate Debit Credit Balance2009

May 1 8,000 8,000

Posting Journal Entries to Posting Journal Entries to the Ledger Accountsthe Ledger Accounts

3-13

General LedgerCash

Date Debit Credit Balance2009

May 1 8,000 8,000 2 2,500 5,500

T accounts are simplified versions of the ledger account that only show the

debit and credit columns.

Ledger Accounts After Ledger Accounts After PostingPosting

3-14

RECORDING BALANCE RECORDING BALANCE SHEET SHEET TRANSACTION:TRANSACTION:

3-15

Net income is not an asset it’s an increase in owners’ equity from profits of the

business.

AA = LL + OEOEIncrease Decrease

As income is earned, either an asset is

increased or a liability is decreased.

Increase

Net income always results in the increase of Owners’ Equity

What is Net Income?What is Net Income?

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Revenue and ExpensesRevenue and ExpensesThe price for goods sold and services rendered during a given accounting period.

Increases owners’ equity.

The costs of goods and services used up in the process of earning revenue.

Decreases owner’s equity.

3-17

Debit and Credit Rules for Debit and Credit Rules for Revenue and ExpensesRevenue and Expenses

EQUITIES

Debit for

Decrease

Credit for

Increase

Expenses decrease owners’ equity.

Revenues increase owners’ equity.

EXPENSES

Credit for

Decrease

Debit for

Increase

REVENUES

Debit for

Decrease

Credit for

Increase

3-18

EQUITIES

Debit for

Decrease

Credit for

Increase

Payments to owners

decrease owners’ equity.

Owners’ investments

increase owners’ equity.

DIVIDENDS

Credit for

Decrease

Debit for

Increase

DividendsDividends

CAPITAL STOCK

Debit for

Decrease

Credit for

Increase

3-19

RECORDING INCOME RECORDING INCOME STATEMENT STATEMENT TRANSACTIONS:TRANSACTIONS:

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End of Chapter 3End of Chapter 3