Chapter 3

The Mechanics of
Accounting

Albrecht, Stice, Stice, Swain

COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are tr 1
ademarks used herein under license.
 The Accounting Cycle

Step 1 Analyze
Analyzetransactions.
transactions.

Step 2 Record
Recordthe
theeffects
effectsof
of the
thetransactions.
transactions.

Summarize
Summarizethe
theeffects
effectsof
oftransactions.
transactions.
Step
3 1.
1.
2.
2.
Posting
Postingjournal
journalentries
Preparing
Preparingaatrial
entries..
trialbalance.
balance.

Prepare
Preparereports.
reports.
Step
4 1.
1.
2.
2.
3.
3.
Adjusting
Adjustingentries.
Preparing
Closing
Closingthe
entries.
Preparingfinancial
financialstatements.
thebooks.
books.
statements.
2
 Analyze Transactions with the
Accounting Equation
A = L + OE
Borrow money

Invest in company

Pay off a note

Purchase
equipment

Borrow funds to
settle a debt 3
 Terminology to Help Analyze
Transactions
• Account
– Accounting record where similar transactions
are recorded.
• T-Account
– Simplified depiction of an account.
• Debit
Name of Account
– Entry on the LEFT.
• Credit Debit Credit
– Entry on the RIGHT.
4
 Double Entry Accounting

• Debits must ALWAYS equal credits!

– If for every transaction, debits equal credits,
then the accounting equation will balance.

5
 Expanded Accounting Equation
Assets Liabilities Owners’ Equity
= +
DR CR DR CR DR CR
+ – – + – +

Capital Stock Retained Earnings

DR CR DR CR
– + – +

Revenues Expenses Dividends

DR CR DR CR DR CR
– + + – + –

6
Assets + Expenses + Dividends = Liabilities + Capital Stock + Revenues
 Journals and Journal Entries
• Journal
– An accounting record in which transactions are
originally entered.
– Chronological record.

General Journal Entry Format:

Date Debit Entry . . . . . . . . . . . . . . xx
Credit Entry . . . . . . . . . . . . xx
Explanation.
7
 Journal Entries
3 steps for success:
1. Identify which accounts are involved.
2. Determine if the account is increased or
decreased.
3. Determine by how much the account
has changed.

8
 Journal Entry Example
• You purchase $250 worth of inventory for
cash on January 30.
– Remember the 3 step process.

January 30
Inventory . . . . . . . . . . . . . . . $250
Cash . . . . . . . . . . . . . . $250
To record purchase of inventory.
9
 Compound Journal Entry
• Compound Journal Entry
– A journal entry that involves more than one
debit or more than one credit or both.
• You make a mortgage payment of $175. Of this,
$150 reduces the mortgage while $25 is interest.
Interest expense . . . . . . . . . . . $25
Mortgage payable . . . . . . . . . . $150
Cash . . . . . . . . . . . . . . . .
$175
To record monthly mortgage payment.
10
 Posting Journal Entries
• Posting
– Transferring amounts from the journal to the
ledger.
• Ledger
– A book of accounts where journal transactions
are posted and thereby summarized.
• Chart of accounts
– A systematic listing of all accounts used by a
company.
11
 The General Ledger
ACCOUNT: Cash Account No. 101

Date Explanation Ref. Debits Credits Balance

Jan. 1 Balance 100
2 Issued 100 shares of capital
stock at $10 per share GJ1 1,000 1,100
3 Purchased equipment GJ1 300 800
4 Sold inventory GJ1 60 860
5 Monthly payment on loan GJ1 230 630
6 Revenue GJ1 2,500 3,130

After all the journal entries are posted to the ledger,

the account balance can be computed by summing
up all of the debits and credits. 12
 The Trial Balance
• Trial Balance
– A listing of all account balances.
– Provides a means of ensuring debits equal
credits.
– From this data, the balance sheet and income
statement can be prepared.
– Prepared by listing all accounts and their
respective balances.

13
 Example Trial Balance
The Example Company
Trial Balance Debits = Credits
December 31, 2009
Debits Credits
Cash $ 21
Accounts Receivable 15
Inventory 12
Land 200
Accounts Payable $ 30
Capital Stock 150
Retained Earnings 24
Sales Revenue 919
Cost of Goods Sold 850
Advertising Expense 10
Miscellaneous Expenses 15 ______
14
Total $ 1,123 $ 1,123
 How Have Computers Changed
the Accounting Cycle?
• Allows businesses to calculate vast
amounts of data quickly.
• Eases posting of journal entries and
summarizing the data into reports and
financial statements.
• Computers can’t think. That is your job!