The Accounting Cycle: Capturing Economic Events

The Accounting Cycle

The Role of Accounting Records

Establishes accountability for assets and transactions.

Keeps track

The Ledger

The entire group of accounts is kept together in an

The Use of Accounts

Increases are recorded on one side of

Debit and Credit Entries

A = L + OE

Debits and credits affect accounts as follows:

Debit

A = L + OE

Debit balances

Credit balances

=

In the double-entry accounting system,

Let’s record selected transactions for JJ’s Lawn Care Service in the

May 1: Jill Jones and her family invested $8,000 in

May 2: JJ’s purchased a riding lawn mower for $2,500

May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000

May 11: JJ’s purchased some repair parts for $300 on

May 18: JJ’s sold half of the repair parts to

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

Posting Journal Entries to the Ledger Accounts

Posting simply means updating

Posting Journal Entries to the Ledger Accounts

Posting Journal Entries to the Ledger Accounts

Let’s see what the cash account looks like after posting the

This ledger format is referred to as a running balance.

Ledger Accounts

T accounts are simplified versions of the ledger account that only

Net income is not an asset ⎯ it’s an increase in

A = L + OE

Retained Earnings

Capital Stock

Retained Earnings

The balance in the

The income statement summarizes the profitability of a business for a

Accounting Periods

Time Period Principle
To provide users of financial statements with timely

Revenue and Expenses

The price for goods sold
and services rendered during

The Revenue Principle: When To Record Revenue

Revenue Principle
Revenue should be recognized

The Matching Principle: When To Record Expenses

Matching Principle
Expenses should be recorded

The Accrual Basis of Accounting

Current Accounting Period

Future Accounting Period

Jan. 1, 2009

Dec. 1,

Debit and Credit Rules for Revenue and Expenses

EQUITIES

Debit for Decrease

Credit for

Payments to owners decrease owners’ equity.

Owners’ investments increase owners’ equity.

Dividends

Let’s analyze the revenue and expense transactions for JJ’s Lawn Care

May 29: JJ’s provided lawn care services for a client

May 31: JJ’s purchased gasoline for the lawn mower and

May 31: JJ’s Lawn Care paid Jill Jones and her

Now, let’s look at the Trial Balance for JJ’s Lawn Care

All balances are taken from the ledger accounts on May 31

The Accounting Cycle in Perspective

Accountants spend much of their time focusing