SUA Chapter 1: Accounting System

What are the five essential steps of recording transactions?

1. Identify the exchanges or adjustments that must be recorded. 2. Determine which account balances are affected by the exchanges or adjustments/ 3. Assign proper values to the transactions for each account. 4. Record the transactions in the proper time period. 5. Record the transactions in the accounting records, and summarize them into the financial statements.

Type of subsidiary ledger for record of employee wages and deductions/withholding

Employee earnings subsidiary ledger/ wages and salaries expense control account in GL

Type of subsidiary ledger for cost of individual delivery equipment assets

Fixed Asset subsidiary ledger/ Delivery equipment control account in GL

Type of subsidiary ledger for depreciation expense on individual delivery equipment

Fixed Asset subsidiary ledger/ Depreciation expense control account in GL

Type of subsidiary ledger for accumulated depreciation on individual delivery equipment assets.

Fixed asset subsidiary ledger/ Accumulated depreciation- delivery equipment control account in GL

Type of subsidiary ledger for perpetual record for each type of inventory

Perpetual inventory subsidiary ledger/ inventory control account in GL

Examples of documents prepared before the transaction occurs and the nature of action causing the need for said document

Purchase orders and Customer purchase orders 1. Issue order to buy goods or services 2. Receive order for a sale of goods or services

Examples of documents prepared at same time transaction occur and the nature of action causing the need for said document

Receiving report and Bill of Lading/Shipping document 1. Receive goods or services 2. Deliver goods

Examples of documents prepared after the transaction occurs and the nature of action causing the need for said document

Sales invoice and vendor's invoice 1. Send bills for goods or services sold 2. Receive bill for goods or services purchased

Purpose of Payroll time card/time report

Used to determine gross pay owed to employee

Purpose of customer purchase orders

Used to determine quantities to ship to customer and amount to bill

Adjusting Entries: Accrued Revenue

a revenue earned for which the cash has not yet been received. An example is interest revenue on a note receivable. An accrued revenue is similar to an accrued expense, except it involves revenue rather than expense. Accrued revenue involves adjusting an asset and a revenue account.

Adjusting Entries: Unearned Revenue

a revenue received in cash in advance of being earned. An example is receiving an interest payment on a note before it is due. Unearned revenue is the opposite of accrued revenue. For unearned revenue, cash is received before the revenue is earned; for accrued revenue, cash is received after it is earned. Unearned revenue involves adjusting a liability and a revenue account.

Adjusting Entries: Accrued Expense

an expense incurred for which payments has not been made. An example is paying rent after it is due. It is the opposite of a prepaid expense. For prepaids, cash is paid before the expense is incurred; for accrued expenses, cash is paid after the expense is incurred. Also involves adjusting a liability and an expense account.

Adjusting Entries: Prepaid Expense

an expense paid for in advance of its use. An example is paying several months' rent in advance. The accrual accounting method requires that rent expense be recorded in the period in which the asset is used rather than the period in which the cash payment is made. Also involves adjustment of both an asset and expense account.

Adjusting Entries: Estimated Items

an expense recorded on the basis of estimates. Examples include bad debt expense, federal income tax expense, and depreciation expense. An adjusting entry for estimated items includes adjusting an expense account and an asset or liability account.

Internal Controls

methods used by a company to safeguard its assets and provide reasonable assurance of accounting data. Most companies have internal controls at each stage of the accounting process.

7 examples of subsidiary records

1. Accounts receivable from each customer 2. Accounts payable to each vendor 3. Cost of individual delivery equipment assets 4. Depreciation expense on individual delivery equipment assets 5. Accumulated depreciation on individual delivery equipment assets 6. Record of employee wages and deductions/withholding 7. perpetual record for each type of inventory

primary types of internal controls

1. Adequate documents and records 2. Authorization of transactions 3. Separation of the custody of assets from accounting 4.Independent checks on performance

Seven important requirements in recording adjusting entries

1. Adjusting entries are prepared only at the end of a period when a company plans to prepare financial statements. Some companies prepare statements monthly, others quarterly, and some only annually. 2. Every adjusting entry affects both the balance sheet and the income statement. 3. The total debits and credits must be equal for each adjusting entry. 4. All adjusting entries are first recorded in the general journal. No other journal is used for adjusting entries. 5. Each adjusting entry is prepared separately. 6. Each amount in each adjusting entry is posted individually to the appropriate general ledger account. 7. Most adjusting entries are not posted to subsidiary ledgers.

Preparing an Adjusted Trial Balance

1. All adjusting entries in the general journal must be posted to the worksheet. After posting all entries, the adjusting entries are combined with the unadjusted trial balance totals. The result is the adjusted trial balance. 2. Adjusting entries must also be posted to the general ledger. This can be done at the same time postings are made to the worksheet. For convenience, most companies wait until after financial statements are prepared to post adjustments to the general ledger.

Nature of transactions typically recorded in a cash disbursements journal and other common titles

1. All cash disbursements made by check except payroll Also called: disbursement journal, check register or payments record

Nature of transactions typically recorded in a Cash receipts journal and other common titles

1. All cash receipts Also called: Receipts register or cash hournal

Nature of transactions typically recorded in a payroll journal and other common titles

1. All payroll disbursements (usually made by check) Also called: payroll register

Nature of transactions typically recorded in a purchases journal and other common titles

1. All purchases of goods and services except payroll 2. purchases returns and allowances may be recorded here or in a separate journal Also called: Acquisitions, accounts payable journal, purchase, voucher register.

Preparing Closing Entries

1. At the end of each year, all revenue and expense accounts are closed. Closing the accounts means eliminating the ending balance and starting with a zero balance in the next year. 2. The closing process happens only annually, even when monthly or quarterly statements are prepared. Many organizations use a calendar year for preparing annual statements. The closing process, therefore, occurs on December 31. Other companies choose different year-ends and thus close at different dates. 3. For a sole proprietorship or partnership, the income summary is closed to one or more capital accounts. In a corporation, it is closed to retained earnings.

Balance Sheet of A Company affected by sales and cash receipts.

1. Cash 2. Accounts Receivable 3. Allowance for doubtful accounts 4. Common Stock

Balance Sheet of a company affected by payroll

1. Cash 2. Wages and salaries payable 3. Federal Income taxes withheld 4. FICA taxes payable 5. Other payroll taxes payable

Balance Sheet of a company affected by purchases and cash disbursements

1. Cash 2. Inventory 3. Prepaid Rent 4. Fixed Assets 5. Accumulated Depreciation 6. Accounts Payable 7. Interest Payable

Three closing entries for a typical company

1. Close all revenue accounts to income summary. (Debit all revenue accounts and credit the income summary account). 2. Close all expense accounts to income summary. (Debit income summary and credit expense accounts.) 3. Close the income summary to stockholders' equity.

Nature of transactions typically recorded in a general journal and other common titles

1. Error corrections, adjusting entries, closing entries, and other transactions not recorded in other journals. Also called: misc. journal

Four essential characteristics of journals:

1. Every transaction occurring during an accounting period should be recorded in a journal. Transactions should not be transferred from documents directly to the general ledger. 2. Journals follow the requirements of a double-entry recording system. Debits and credits for each transaction must be equal. 3. Most companies use a general journal and several special journals. The special journals are a convenient way to summarize similar, repetitive types of transactions such as sales, cash receipts, and purchases. The general journal is used for mostly non-repetitive transactions such as error corrections, adjusting entries, and transactions not appropriate for any of the special journals. 4. The number and titles for different companies vary with the accounting information needs and system design preferences of management.

Preparing a Unadjusted General ledger Trial Balance

1. It is a listing of general ledger account balances at a point of time, with the debits in one column and the credits in another. The total debits must equal the total credits. If they don't, the error in the general ledger or trial balance should be corrected. A trial balance is typically prepared whenever a company plans to prepare financial statements. 2. A distinction should be made between an unadjusted and an adjusted trial balance. An unadjusted trial balance is the listing of account balances in the general ledger before adjusting journal entries are made for month- and year-end accruals, prepayments, and errors. An adjusted trial balance is the listing of account balances after all adjustments are made.

Six general categories of adjusting entries

1. Prepaid expense 2. Accrued expense 3. Accrued revenue 4. Unearned revenue 5. Estimated items 6. Inventory adjustment

Income Statement of a company affected by purchases and cash disbursements

1. Purchases 2. Rent 3. Repair 4. Postage 5. Travel 6. Utilities 7. Freight-in

Income Statement of a company affected by sales and cash receipts

1. Sales 2. Sales returns and allowances 3. Bad debt expense 4. Sales discounts taken

types of typical journals

1. Sales Journal (SJ) 2. Cash receipts journal (CR) 3. purchases journal (PJ) 4. Cash disbursements journal (CD) 5. Payroll journal (PR) 6. General journal (GJ)

The three most common transaction cycles are:

1. Sales and cash receipts 2. Purchases and cash disbursements (purchase of goods and services and cash disbursements, excluding payroll) 3. Payroll (purchase of employee services and disbursements for those services)

Nature of transactions typically recorded in a sales journal and other common titles

1. Sales or other revenue 2. Sales returns and allowances may be recorded here or in a separate journal Also called: revenue, cash sales & accounts receivable journal

Preparing Financial Statements

1. The final step on the worksheet is completing the income statement and balance sheet columns. The information in these columns is used to prepare the financial statements. 2. The totals from the adjusted trial balance are transferred from either the income statement or balance sheet columns. In addition, the net loss is shown as a reduction in both the income statement debit column and the balance sheet credit column. If there had been net income for the year, the amounts would have been shown as increases in the same columns. 3. The financial statements are prepared directly from the income statement and balance sheet columns in the worksheet.

Several differences between the worksheet totals and the financial statements

1. The financial statements' descriptions and details must be carefully stated to conform to generally accepted accounting principles. 2. Frequently, more than one account balance is combined in the trial balance to make up a financial statement total. For example, all selling expenses may be combined and only total selling expense included in the financial statements. 3. Classified financial statements must distinguish between current and non-current assets and liabilities. Trial balances usually do not. 4. Financial statements must include a cash flow statement. Some information to prepare that statement may or may not be available on the trial balance. Examples include proceeds from new loans and payments made on loans during the period. 5. Footnote information and other disclosures required for financial statements are usually not available on the trial balance.

preparing a general ledger

1. The number and description of general ledger accounts depend on the needs of management. Some companies have hundred of accounts; others have only a few. 2. All transactions must be transferred (posted) from the journals to the general ledger periodically, usually monthly. 3. For specialized journals, such as the sales journal, the transactions are totaled monthly in each journal for each account. Only the total is posted to the general ledger. For the general journal, individual transactions are posted to the general ledger. The reason is that general journal transactions vary considerably, which results in few common ledger accounts and no totals to post. 4. The general ledger includes the accumulated net total of all transactions, by account balance, since the inception of the company. For example, the cash-in-bank balance is the net of cash receipts and cash disbursements since the company started.

Important facts about closing entries

1. They are only prepared at the end of the organization's year. The year-end may be December 31 or another month-end. 2. Closing entries are prepared after all transactions and adjusting entries have been prepared and posted to the general ledger. Closing entries complete the accounting process for the current period. 3. Every revenue and expense account must be closed to enable the company to begin a new year with a zero balance. 4. The total debits and total credits must be equal for each closing entry. 5. Each account in each closing entry is posted individually to the appropriate general ledger account. 6. Closing entries are recorded initially in the general journal and then posted to the general ledger.

9 steps in the Accounting Process

1. Transactions Occur 2. Prepare Documents 3. Record in Journals 4. Post to Ledgers 5. Prepare Unadjusted General Ledger Trial Balance 6. Prepare and Post Adjusting Entries 7. Prepare Adjusted Trial Balance 8. Prepare Financial Statements 9. Prepare Closing Entries

Income Statement of a company affected by payroll

1. Wages and salaries expense 2.Payroll tax expense

post-closing trial balance

1. a trial balance prepared after the closing entries are posted. 2. The purpose are to make sure that debits equal credits in the general ledger before the recording process starts for the next year, the retained earning balance is correct, and there are no balances in any income statement account. 3. The post-closing trial balance is a two-column listing, much like the first two columns in a worksheet. The source of each amount is the general ledger balance.

Types of documents used in business

1. payroll time card/ time report that includes hours worked and authorization for payment 2. customer purchase order that includes the quantity ordered and the agreed-upon price 3. Sales invoice that includes the total amount of sale 4.Monthly bank statement

Type of subsidiary ledger for accounts payable to each vendor

AP subsidiary ledger/ AP Control Account in GL

Type of subsidiary ledger for Accounts receivable from each customer

Accounts Receivable subsidiary ledger/ A/R Control account in GL

Relationships among financial statements, trial balances, ledgers, journals, documents, and transactions. (EXAMPLES)

TRANSACTIONS (Sale of goods) --> DOCUMENTS (Sales Invoice) --> JOURNALS (Sales Journal) --> SUBSIDIARY LEDGER (A/R Sub. ledger) --> GENERAL LEDGER (A/R ledger balance) -->UNADJUSTED TRIAL BALANCE --> ADJUSTING ENTRIES (Adjusting Entry for Bad debts) --> ADJUSTED TRIAL BALANCE-->FINANCIAL STATEMENTS (Balance Sheet, Income Statement, cash flow statement)

Significance of recording adjusting entries

The primary reason for preparing adjusting entries is to convert from the cash basis of accounting to the accrual basis. Most transactions are recorded in the journals on the accrual basis.An example is recording the purchase of inventory when the merchandise is received rather than when it is paid for.

Purpose of sales invoices

provides information to customer and for recording sales transaction

Purpose of monthly bank statement

provides information to determine whether the company or bank has error or omissions in recording cash receipts and disbursements.

Adjusting Entries: Inventory Adjustment

under the periodic inventory method, the ending inventory must be recorded. At the same time the account balances in purchases, purchases returns and allowances, freight-in, and purchase discounts are transferred to cost of goods sold. The debit part of the adjusting includes ending inventory, cost of goods sold, purchases returns and allowances, and discounts. The credit part includes beginning inventory, purchases, and freight-in.