The Accounting Cycle
Event happens, interpret event, enter into journal, post to ledger, unadjusted trial balance, adjusting entries, adjusted trial balance, close temporary accounts, post-closing trial balances, prepare statements
Accounts to Debit
Assets: Cash, merchandise inventory, A/R, prepaid rent, equipment, (accum. depr.)
Owner's Equity: expenses, losses, dividends, COGS, depreciation expense
Accounts to Credit
Liabilities: A/P, unearned revenue, dividends payable, wages payable
Owner's Equity: Common stock (investments by owners/owner's contributions), retained earnings, revenue, gains
Balance of debits and credits
Beware: balances only means total of debits and credits are equal, so...
1) If you miss a transaction
2) Wrong amounts to correct accounts
3) Right amounts to wrong accounts
4) Wrong amounts to wrong accounts...
...it will still balance!
Purpose of adjusting entries
Adjusting entries are made at the end of every reporting period to ensure:
1) Revenue is recognized when it is earned, realized or realizable
2) Expenses (losses) are recognized in the period in which they contribute to the production of revenue -matching
3) Certain accounts are valued at their market value rather than original cost (later)-investments, inventories, and receivables
Accrual adjusting entries
Asset or liability increases (builds up) as time passes, e.g. interest receivables from bank or interest payable related to loan
Common aspects of all adjusting entries
1) Involves at least one balance sheet and one income statement
2) Doesn't involve cash account (except when reconciling cash itself)
Adjusting entry needed when:
At the end of the period, we still have all of the asset or owe all of the liability, or we used it all up/earned all of it
Capitalizing and Expensing
Whether you capitalize or expense, in the long-run it will be the same, but in the short-run in will be different.
Revenues, expenses, gains, losses, dividends (will show a zero balance on post-closing trial balance)
Criteria for recognizing economic events in accounting records:
2) Objectively measurable