Copyright
©
1998 John Wiley & Sons, Inc. Kieso/Intermediate 9e
DOUBLE-ENTRY ACCOUNTING SYSTEM
10
DOUBLE-ENTRY ACCOUNTING
REAL (PERMANENT) ACCOUNTS
LIABILITIES Debit/DR Credit/CR Decrease Increase – ¯ + -Normal Balance CAPITAL/OWNERS' EQUITY Debit/DR Credit/CR Decrease Increase – ¯ + -Normal Balance ASSETS Debit/DR Credit/CR Increase Decrease + - – ¯ RETAINED EARNINGS Debit/DR Credit/CR Decrease Increase – ¯ + -Normal Balance
REVENUES (and GAINS)
Debit/DR Credit/CR
Decrease Increase
– ¯ +
-Normal Balance EXPENSES (and LOSSES)
Debit/DR Credit/CR
Decrease Increase
+ - – ¯
NOMINAL ACCOUNTS
Rules of Thumb
If the "normal balance" for an account is a debit, then the account is increased by a debit
and decreased by a credit.
Contra Accounts have normal balances that are the opposite of their "parent" accounts. If the "normal balance" for an account is a debit,
then the account is increased by a debit and decreased by a credit.
If the "normal balance" for an account is a credit, then the account is increased by a credit
and decreased by a credit. Normal Balance
=
+
+
TRANSACTIONS AFFECTING THE EQUITY ACCOUNTS
Ownership Structure
Proprietorships and Partnerships Corporations Real (Permanent) Accounts Nominal (Temporary) Accounts Real (Permanent) Accounts Nominal (Temporary) Accounts Impact on Owners' Equity Transactions Affecting Owners' EquityInvestment by Owner(s) Increase Capital Common Stock and related accounts Revenues Earned Increase Revenue Revenue
Expenses Incurred Decrease Expense Capital Expense Withdrawal by Owner(s) Decrease Drawing Dividends
Source: Kieso and Weygandt, Intermediate Accounting, 9th Edition
Copyright © 1998 John Wiley & Sons, Inc. Kieso/Intermediate 9e
THE ACCOUNTING CYCLE
12 Identification and
Measurement of Transactions and Other Events
Reversing entries (optional) Post-closing trial-balance (optional) Closing (nominal accounts) Statement preparation Income statement Retained earnings Balance sheet Cash flows Journalization General journal Cash receipts journal
Cash disbursements journal Purchases journal
Sales journal
Other special journals
Posting
General ledger (usually monthly) Subsidiary ledgers (usually daily)
Work Sheet (optional) Trial balance preparation Adjustments Accruals Prepayments Estimated items
Adjusted trial balance
TYPES OF ADJUSTING ENTRIES
Cash is Paid or Received
PREPAYMENTS
Asset
®
ExpenseOriginal
Entry Prepaid Insurance xx
Cash xx
Adjusting
Entry Insurance Expense xx Prepaid Insurance xx
Expense/Liability
Adjusting
Entry Salaries Expense xx
Salaries Payable xx
Subsequent
Entry Salaries Payable xx
Copyright © 1998 John Wiley & Sons, Inc. Kieso/Intermediate 9e
ADJUSTING AND CLOSING THE INVENTORY ACCOUNTS
14 Beginning Inventory Ending Inventory
Cost of Goods Sold
Adjust for beginning inventory by crediting Inventory and debiting Cost of Goods Sold
Adjust for ending
inventory by debiting Inventory and crediting Cost of Goods Sold
Close these accounts by debiting the account and crediting
Cost of Goods Sold Close these accounts by
debiting the account and crediting
Cost of Goods Sold Accounts with Normal
Debit Balances: Purchases
Transportation-in
Accounts with Normal Credit Balances: Purchase Discounts Purchase Allowances Returned Purchases (or Purchase Returns)
Beginning Inventory and Temporary Accounts with
Normal Debit Balances:
1. An overstatement of these items results in an overstatement of
Cost of Goods Sold and an understatement of net income.
2. An understatement of these items results in an understatement of Cost of Goods Sold and an overstatement of net income.
Ending Inventory and Temporary Accounts with
Normal Credit Balances:
1. An overstatement of these items results in an understatement of Cost of Goods Sold and an overstatement of net income.
2. An understatement of these items results in an overstatement of
REVERSING ENTRIES
REVERSING ENTRIES
JOURNAL ENTRIES
Accounting System Where Reversing Entries ARE Used
Accounting System Where Reversing Entries are NOT Used
(1a) During 1999 (1a) Sales Salaries Expense…………. 409,600 (1a) Sales Salaries Expense………… 409,600
Salaries Payable……… 409,600 Salaries Payable……….. 409,600 (1b) During 1999 (1b) Salaries Payable………..409,600 (1b) Salaries Payable………. 409,600
Cash……… 409,600 Cash……….. 409,600 (2) 12/31/99 Adjusting (2) Sales Salaries Expense…………. 6,400 (2) Sales Salaries Expense………… 6,400
Salaries Payable……… 6,400 Salaries Payable……….. 6,400 (3) 12/31/99 Closing (3) Income Summary……… 416,000 (3) Income Summary………... 416,000
Sales Salaries Expense……… 416,000 Sales Salaries Expense…….. 416,000 (4) 1/1/00 Reversing (4) Salaries Payable……….. 6,400 (4) No entry.
Sales Salaries Expense……… 6,400
(5) 1/1/00 Payroll (5) Sales Salaries Expense…………. 8,000 (5) Sales Salaries Expense………… 1,600 Cash………. 8,000 Salaries Payable………. 6,400
Cash……… 8,000 409,600 (2) 12/31/99 Adjusting 6,400 6,400 6,400 6,400 (3) 12/31/99 Closing 416,000 416,600 (4) 1/1/00 Reversing 6,400 (5) 1/1/00 Payroll 8,000 1,600 6,400
Sales Salaries Expense for the year 1999 $416,000 $416,000 Balance of Salaries Payable at close of business on 12/31/99 $6,400 $6,400 Sales Salaries Expense for the day 1/1/00 $1,600 $1,600 Balance of Salaries Payable at close of business on 1/1/00 $ 0 $ 0
LEDGER ACCOUNT POSTINGS
Sales Salaries
Expense Salaries Payable
Sales Salaries
Expense Salaries Payable
FINANCIAL STATEMENTS
(1a) During 1999 409,600 409,600 409,600
Copyright © 1998 John Wiley & Sons, Inc. Kieso/Intermediate 9e
CONVERSION FROM CASH BASIS TO ACCRUAL BASIS
16