Wednesday, October 12, 2011

FINANCIAL ACCOUNTING BOOK

MODUL : AKUNTANSI
KELAS    : XI IPS
UNTUK KALANGAN SENDIRI
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Introduction to Accounting

Accounting is the language of business. It is the system of recording, summarizing, and analyzing an economic entity's financial transactions. Effectively communicating this information is key to the success of every business. Those who rely on financial information include internal users, such as a company's managers and employees, and external users, such as banks, investors, governmental agencies, financial analysts, and labor unions. These users depend upon data supplied by accountants to answer the following types of questions:
·         Is the company profitable?
·         Is there enough cash to meet payroll needs?
·         How much debt does the company have?
·         How does the company's net income compare to its budget?
·         What is the balance owed by customers?
·         Has the company consistently paid cash dividends?
·         How much income does each division generate?
·         Should the company invest money to expand?
Accountants must present an organization's financial information in clear, concise reports that help make questions like these easy to answer. The most common accounting reports

Understanding Financial Statements

The financial statements shown on the next several pages are for a sole proprietorship, which is a business owned by an individual. Corporate financial statements are slightly different. The four basic financial statements are the income statement, statement of owner's equity, balance sheet, and statement of cash flows. The income statement, statement of owner's equity, and statement of cash flows report activity for a specific period of time, usually a month, quarter, or year. The balance sheet reports balances of certain elements at a specific time. All four statements have a three-line heading in the following format:
Income statement. The income statement, which is sometimes called the statement of earnings or statement of operations, is prepared first. It lists revenues and expenses and calculates the company's net income or net loss for a period of time. Net income means total revenues are greater than total expenses. Net loss means total expenses are greater than total revenues. The specific items that appear in financial statements are explained later.
The Greener Landscape Group Income Statement For the Month Ended April 30, 20X2
Revenues
    Lawn Cutting Revenue
$845
Expenses
    Wages Expense
$280
    Depreciation Expense
235
    Insurance Expense
100
    Interest Expense
79
    Advertising Expense
35
    Gas Expense
30
    Supplies Expense
25
      Total Expenses
784
Net Income
$ 61
Statement of owner's equity. The statement of owner's equity is prepared after the income statement. It shows the beginning and ending owner's equity balances and the items affecting owner's equity during the period. These items include investments, the net income or loss from the income statement, and withdrawals. Because the specific revenue and expense categories that determine net income or loss appear on the income statement, the statement of owner's equity shows only the total net income or loss. Balances enclosed by parentheses are subtracted from unenclosed balances.
The Greener Landscape Group Statement of Owner's Equity For the Month Ended April 30, 20X2
J. Green, Capital, April 1
$ 0
Additions
    Investments
$15,000
    Net Income
61
15,061
Withdrawals
(50)
J. Green, Capital, April 30
$ 15,011
Balance sheet. The balance sheet shows the balance, at a particular time, of each asset, each liability, and owner's equity. It proves that the accounting equation (Assets = Liabilities + Owner's Equity) is in balance. The ending balance on the statement of owner's equity is used to report owner's equity on the balance sheet.
The Greener Landscape Group Balance Sheet April 30, 20X2
ASSETS
Current Assets
    Cash
$ 6,355
    Accounts Receivable
200
    Supplies
25
    Prepaid Insurance
1,100
      Total Current Assets
7,680
Property, Plant, and Equipment
    Equipment
$18,000
    Less: Accumulated Depreciation
(235)
17,765
      Total Assets
$25,445
LIABILITIES AND OWNER'S EQUITY
Current Liabilities
    Accounts Payable
$ 50
    Wages Payable
80
    Interest Payable
79
    Unearned Revenue
225
      Total Current Liabilities
434
Long-Term Liabilities
    Notes Payable
10,000
      Total Liabilities
10,434
Owner's Equity
    J. Green, Capital
15,011
      Total Liabilities and Owner's Equity
$25,445
Statement of cash flows. The statement of cash flows tracks the movement of cash during a specific accounting period. It assigns all cash exchanges to one of three categories—operating, investing, or financing—to calculate the net change in cash and then reconciles the accounting period's beginning and ending cash balances. As its name implies, the statement of cash flows includes items that affect cash. Although not part of the statement's main body, significant non-cash items must also be disclosed.
According to current accounting standards, operating cash flows may be disclosed using either the direct or the indirect method. The direct method simply lists the net cash flow by type of cash receipt and payment category. For purposes of illustration, the direct method appears below.
The Greener Landscape Group Statement of Cash Flows For the Month Ended April 30, 20X2
Cash Flows from Operating Activities
    Cash from Customers
$ 870
    Cash to Employees
(200)
    Cash to Suppliers
(1,265)
      Cash Flow Used by Operating Activities
(595)
Cash Flows from Investing Activities
    Purchases of Equipment
(8,000)
Cash Flows from Financing Activities
    Investment by Owner
15,000
    Withdrawal by Owner
(50)
      Cash Flow Provided by Financing Activities
14,950
Net Increase in Cash
6,355
Beginning Cash, April 1
0
Ending Cash, April 30
$6,355

The Accounting Equation

The ability to read financial statements requires an understanding of the items they include and the standard categories used to classify these items. The accounting equation identifies the relationship between the elements of accounting.
Assets. An asset is something of value the company owns. Assets can be tangible or intangible. Tangible assets are generally divided into three major categories: current assets (including cash, marketable securities, accounts receivable, inventory, and prepaid expenses); property, plant, and equipment; and long-term investments. Intangible assets lack physical substance, but they may, nevertheless, provide substantial value to the company that owns them. Examples of intangible assets include patents, copyrights, trademarks, and franchise licenses. A brief description of some tangible assets follows.
·         Current assets typically include cash and assets the company reasonably expects to use, sell, or collect within one year. Current assets appear on the balance sheet (and in the numbered list below) in order, from most liquid to least liquid. Liquid assets are readily convertible into cash or other assets, and they are generally accepted as payment for liabilities.
1.      Cash includes cash on hand (petty cash), bank balances (checking, savings, or money-market accounts), and cash equivalents. Cash equivalents are highly liquid investments, such as certificates of deposit and U.S. treasury bills, with maturities of ninety days or less at the time of purchase.
2.      Marketable securities include short-term investments in stocks, bonds (debt), certificates of deposit, or other securities. These items are classified as marketable securities—rather than long-term investments—only if the company has both the ability and the desire to sell them within one year.
3.      Accounts receivable are amounts owed to the company by customers who have received products or services but have not yet paid for them.
4.      Inventory is the cost to acquire or manufacture merchandise for sale to customers. Although service enterprises that never provide customers with merchandise do not use this category for current assets, inventory usually represents a significant portion of assets in merchandising and manufacturing companies.
5.      Prepaid expenses are amounts paid by the company to purchase items or services that represent future costs of doing business. Examples include office supplies, insurance premiums, and advance payments for rent. These assets become expenses as they expire or get used up.
·         Property, plant, and equipment is the title given to long-lived assets the business uses to help generate revenue. This category is sometimes called fixed assets. Examples include land, natural resources such as timber or mineral reserves, buildings, production equipment, vehicles, and office furniture. With the exception of land, the cost of an asset in this category is allocated to expense over the asset's estimated useful life.
·         Long-term investments include purchases of debt or stock issued by other companies and investments with other companies in joint ventures. Long-term investments differ from marketable securities because the company intends to hold long-term investments for more than one year or the securities are not marketable.
Liabilities. Liabilities are the company's existing debts and obligations owed to third parties. Examples include amounts owed to suppliers for goods or services received (accounts payable), to employees for work performed (wages payable), and to banks for principal and interest on loans (notes payable and interest payable). Liabilities are generally classified as short-term (current) if they are due in one year or less. Long-term liabilities are not due for at least one year.
Owner's equity. Owner's equity represents the amount owed to the owner or owners by the company. Algebraically, this amount is calculated by subtracting liabilities from each side of the accounting equation. Owner's equity also represents the net assets of the company.
In a sole proprietorship or partnership, owner's equity equals the total net investment in the business plus the net income or loss generated during the business's life. Net investment equals the sum of all investment in the business by the owner or owners minus withdrawals made by the owner or owners. The owner's investment is recorded in the owner's capital account, and any withdrawals are recorded in a separate owner's drawing account. For example, if a business owner contributes $10,000 to start a company but later withdraws $1,000 for personal expenses, the owner's net investment equals $9,000. Net income or net loss equals the company's revenues less its expenses. Revenues are inflows of money or other assets received from customers in exchange for goods or services. Expenses are the costs incurred to generate those revenues.
Capital investments and revenues increase owner's equity, while expenses and owner withdrawals (drawings) decrease owner's equity. In a partnership, there are separate capital and drawing accounts for each partner.
Stockholders' equity. In a corporation, ownership is represented by shares of stock, so the owners' equity. is called stockholders' equity or shareholders' equity. Corporations use several types of accounts to record stockholders' equity activities: preferred stock, common stock, paid-in capital (these are often referred to as contributed capital), and retained earnings. Contributed capital accounts record the total amount invested by stockholders in the corporation. If a corporation issues more than one class of stock, separate accounts are maintained for each class. Retained earnings equal net income or loss over the life of the business less any amounts given back to stockholders in the form of dividends. Dividends affect stockholders' equity in the same way that owner withdrawals affect owner's equity in sole proprietorships and partnerships.

Financial Reporting Objectives

Financial statements are prepared according to agreed upon guidelines. In order to understand these guidelines, it helps to understand the objectives of financial reporting. The objectives of financial reporting, as discussed in the Financial Accounting standards Board (FASB) Statement of Financial Accounting Concepts No. 1, are to provide information that is useful to existing and potential investors and creditors and other users in making rational investment, credit, and similar decisions;
1.      helps existing and potential investors and creditors and other usear to assess the amounts, timing, and uncertainty of pro spective net cash inflows to the enterprise;
2.      identifies the economic resources of an enterprise, the claims to those resources, and the effects that transactions, events, and circumstances have on those resources.

Generally Accepted Accounting Principles

Accountants use generally accepted accounting principles (GAAP) to guide them in recording and reporting financial information. GAAP comprises a broad set of principles that have been developed by the accounting profession and the Securities and Exchange Commission (SEC). Two laws, the Securities Act of 1933 and the Securities Exchange Act of 1934, give the SEC authority to establish reporting and disclosure requirements. However, the SEC usually operates in an oversight capacity, allowing the FASB and the Governmental Accounting Standards Board (GASB) to establish these requirements. The GASB develops accounting standards for state and local governments.
The current set of principles that accountants use rests upon some underlying assumptions. The basic assumptions and principles presented on the next several pages are considered GAAP and apply to most financial statements. In addition to these concepts, there are other, more technical standards accountants must follow when preparing financial statements. Some of these are discussed later in this book, but other are left for more advanced study.
Economic entity assumption. Financial records must be separately maintained for each economic entity. Economic entities include businesses, governments, school districts, churches, and other social organizations. Although accounting information from many different entities may be combined for financial reporting purposes, every economic event must be associated with and recorded by a specific entity. In addition, business records must not include the personal assets or liabilities of the owners.
Monetary unit assumption. An economic entity's accounting records include only quantifiable transactions. Certain economic events that affect a company, such as hiring a new chief executive officer or introducing a new product, cannot be easily quantified in monetary units and, therefore, do not appear in the company's accounting records. Furthermore, accounting records must be recorded using a stable currency. Businesses in the United States usually use U.S. dollars for this purpose.
Full disclosure principle. Financial statements normally provide information about a company's past performance. However, pending lawsuits, incomplete transactions, or other conditions may have imminent and significant effects on the company's financial status. The full disclosure principle requires that financial statements include disclosure of such information. Footnotes supplement financial statements to convey this information and to describe the policies the company uses to record and report business transactions.
Time period assumption. Most businesses exist for long periods of time, so artificial time periods must be used to report the results of business activity. Depending on the type of report, the time period may be a day, a month, a year, or another arbitrary period. Using artificial time periods leads to questions about when certain transactions should be recorded. For example, how should an accountant report the cost of equipment expected to last five years? Reporting the entire expense during the year of purchase might make the company seem unprofitable that year and unreasonably profitable in subsequent years. Once the time period has been established, accountants use GAAP to record and report that accounting period's transactions.
Accrual basis accounting. In most cases, GAAP requires the use of accrual basis accounting rather than cash basis accounting. Accrual basis accounting, which adheres to the revenue recognition, matching, and cost principles discussed below, captures the financial aspects of each economic event in the accounting period in which it occurs, regardless of when the cash changes hands. Under cash basis accounting, revenues are recognized only when the company receives cash or its equivalent, and expenses are recognized only when the company pays with cash or its equivalent.
Revenue recognition principle. Revenue is earned and recognized upon product delivery or service completion, without regard to the timing of cash flow. Suppose a store orders five hundred compact discs from a wholesaler in March, receives them in April, and pays for them in May. The wholesaler recognizes the sales revenue in April when delivery occurs, not in March when the deal is struck or in May when the cash is received. Similarly, if an attorney receives a $100 retainer from a client, the attorney doesn't recognize the money as revenue until he or she actually performs $100 in services for the client.
Matching principle. The costs of doing business are recorded in the same period as the revenue they help to generate. Examples of such costs include the cost of goods sold, salaries and commissions earned, insurance premiums, supplies used, and estimates for potential warranty work on the merchandise sold. Consider the wholesaler who delivered five hundred CDs to a store in April. These CDs change from an asset (inventory) to an expense (cost of goods sold) when the revenue is recognized so that the profit from the sale can be determined.
Cost principle. Assets are recorded at cost, which equals the value exchanged at the time of their acquisition. In the United States, even if assets such as land or buildings appreciate in value over time, they are not revalued for financial reporting purposes.
Going concern principle. Unless otherwise noted, financial statements are prepared under the assumption that the company will remain in business indefinitely. Therefore, assets do not need to be sold at fire-sale values, and debt does not need to be paid off before maturity. This principle results in the classification of assets and liabilities as short-term (current) and long-term. Long-term assets are expected to be held for more than one year. Long-term liabilities are not due for more than one year.
Relevance, reliability, and consistency. To be useful, financial information must be relevant, reliable, and prepared in a consistent manner. Relevant information helps a decision maker understand a company's past performance, present condition, and future outlook so that informed decisions can be made in a timely manner. Of course, the information needs of individual users may differ, requiring that the information be presented in different formats. Internal users often need more detailed information than external users, who may need to know only the company's value or its ability to repay loans. Reliable information is verifiable and objective. Consistent information is prepared using the same methods each accounting period, which allows meaningful comparisons to be made between different accounting periods and between the financial statements of different companies that use the same methods.
Principle of conservatism. Accountants must use their judgment to record transactions that require estimation. The number of years that equipment will remain productive and the portion of accounts receivable that will never be paid are examples of items that require estimation. In reporting financial data, accountants follow the principle of conservatism, which requires that the less optimistic estimate be chosen when two estimates are judged to be equally likely. For example, suppose a manufacturing company's Warranty Repair Department has documented a three-percent return rate for product X during the past two years, but the company's Engineering Department insists this return rate is just a statistical anomaly and less than one percent of product X will require service during the coming year. Unless the Engineering Department provides compelling evidence to support its estimate, the company's accountant must follow the principle of conservatism and plan for a three-percent return rate. Losses and costs—such as warranty repairs—are recorded when they are probable and reasonably estimated. Gains are recorded when realized.
Materiality principle. Accountants follow the materiality principle, which states that the requirements of any accounting principle may be ignored when there is no effect on the users of financial information. Certainly, tracking individual paper clips or pieces of paper is immaterial and excessively burdensome to any company's accounting department. Although there is no definitive measure of materiality, the accountant's judgment on such matters must be sound. Several thousand dollars may not be material to an entity such as General Motors, but that same figure is quite material to a small, family-owned business.

Internal Control

Internal control is the process designed to ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations. Safeguarding assets against theft and unauthorized use, acquisition, or disposal is also part of internal control.
Control environment. The management style and the expectations of upper-level managers, particularly their control policies, determine the control environment. An effective control environment helps ensure that established policies and procedures are followed. The control environment includes independent oversight provided by a board of directors and, in publicly held companies, by an audit committee; management's integrity, ethical values, and philosophy; a defined organizational structure with competent and trustworthy employees; and the assignment of authority and responsibility.
Control activities. Control activities are the specific policies and procedures management uses to achieve its objectives. The most important control activities involve segregation of duties, proper authorization of transactions and activities, adequate documents and records, physical control over assets and records, and independent checks on performance. A short description of each of these control activities appears below.
·         Segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping. For example, the same person who is responsible for an asset's recordkeeping should not be respon sible for physical control of that asset Having different indi viduals perform these functions creates a system of checks and balances.
·         Proper authorization of transactions and activities helps ensure that all company activities adhere to established guide lines unless responsible managers authorize another course of action. For example, a fixed price list may serve as an official authorization of price for a large sales staff. In addition, there may be a control to allow a sales manager to authorize reason able deviations from the price list.
·         Adequate documents and records provide evidence that financial statements are accurate. Controls designed to ensure adequate recordkeeping include the creation of invoices and other documents that are easy to use and sufficiently informa tive; the use of prenumbered, consecutive documents; and the timely preparation of documents.
·         Physical control over assets and records helps protect the company's assets. These control activities may include elec tronic or mechanical controls (such as a safe, employee ID cards, fences, cash registers, fireproof files, and locks) or computer-related controls dealing with access privileges or established backup and recovery procedures.
·         Independent checks on performance, which are carried out by employees who did not do the work being checked, help ensure the reliability of accounting information and the efficiency of operations. For example, a supervisor verifies the accuracy of a retail clerk's cash drawer at the end of the day. Internal auditors may also verity that the supervisor performed the check of the cash drawer.
In order to identify and establish effective controls, management must continually assess the risk, monitor control implementation, and modify controls as needed. Top managers of publicly held companies must sign a statement of responsibility for internal controls and include this statement in their annual report to stockholders.

 

Analyzing Transactions

The first step in the accounting process is to analyze every transaction (economic event) that affects the business. The accounting equation (Assets = Liabilities + Owner's Equity) must remain in balance after every transaction is recorded, so accountants must analyze each transaction to determine how it affects owner's equity and the different types of assets and liabilities before recording the transaction.
Assume Mr. J. Green invests $15,000 to start a landscape business. This transaction increases the company's assets, specifically cash, by $15,000 and increases owner's equity by $15,000. Notice that the accounting equation remains in balance.
Mr. Green uses $5,000 of the company's cash to place a down-payment on a used truck that costs $15,000, and he signs a note payable that requires him to pay the remaining $10,000 in eighteen months. This transaction decreases one type of asset (cash) by $5,000, increases another type of asset (vehicles) by $15,000, and increases a liability (notes payable) by $10,000. The accounting equation remains in balance, and Mr. Green now has two types of assets ($10,000 in cash and a vehicle worth $15,000), a liability (a $10,000 note payable), and owner's equity of $15,000.
Given the large number of transactions that companies usually have, accountants need a more sophisticated system for recording transactions than the one shown on the previous page. Accountants use the double-entry bookkeeping system to keep the accounting equation in balance and to double-check the numerical accuracy of transaction entries. Under this system, each transaction is recorded using at least two accounts. An account is a record of all transactions involving a particular item.
Companies maintain separate accounts for each type of asset (cash, accounts receivable, inventory, etc.), each type of liability (accounts payable, wages payable, notes payable, etc.), owner investments (usually referred to as the owner's capital account in a sole proprietorship), owner drawings (withdrawals made by the owner), each type of revenue (sales revenue, service revenue, etc.), and each type of expense (rent expense, wages expense, etc.). All accounts taken together make up the general ledger. For organizational purposes, each account in the general ledger is assigned a number, and companies maintain a chart of accounts, which lists the accounts and account numbers.
Account numbers vary significantly from one company to the next, depending on the company's size and complexity. A sole proprietorship may have few accounts, but a multinational corporation may have thousands of accounts and use ten- or even twenty-digit numbers to track accounts by location, department, project code, and other categories. Most companies numerically separate asset, liability, owner's equity, revenue, and expense accounts. A typical small business might use the numbers 100–199 for asset accounts, 200–299 for liability accounts, 300–399 for owner's equity accounts, 400–499 for revenue accounts, and 500–599 for expense accounts.

T Accounts

The simplest account structure is shaped like the letter T. The account title and account number appear above the T. Debits (abbreviated Dr.) always go on the left side of the T, and credits (abbreviated Cr.) always go on the right.
Accountants record increases in asset, expense, and owner's drawing accounts on the debit side, and they record increases in liability, revenue, and owner's capital accounts on the credit side. An account's assigned normal balance is on the side where increases go because the increases in any account are usually greater than the decreases. Therefore, asset, expense, and owner's drawing accounts normally have debit balances. Liability, revenue, and owner's capital accounts normally have credit balances. To determine the correct entry, identify the accounts affected by a transaction, which category each account falls into, and whether the transaction increases or decreases the account's balance. You may find the following chart helpful as a reference.
Occasionally, an account does not have a normal balance. For example, a company's checking account (an asset) has a credit balance if the account is overdrawn.
The way people often use the words debit and credit in everyday speech is not how accountants use these words. For example, the word credit generally has positive associations when used conversationally: in school you receive credit for completing a course, a great hockey player may be a credit to his or her team, and a hopeless romantic may at least deserve credit for trying. Someone who is familiar with these uses for credit but who is new to accounting may not immediately associate credits with decreases to asset, expense, and owner's drawing accounts. If a business owner loses $5,000 of the company's cash while gambling, the cash account, which is an asset, must be credited for $5,000. (The accountant who records this entry may also deserve credit for realizing that other job offers merit consideration.) For accounting purposes, think of debit and credit simply in terms of the left-hand and right-hand side of a T account.

Double‐Entry Bookkeeping

Under the double-entry bookkeeping system, the full value of each transaction is recorded on the debit side of one or more accounts and also on the credit side of one or more accounts. Therefore, the combined debit balance of all accounts always equals the combined credit balance of all accounts.
Suppose a new company obtains a long-term loan for $50,000 on August 1. The company's cash account (an asset) increases by $50,000, so it is debited for this amount. Simultaneously, the company's notes payable account (a liability) increases by $50,000, so it is credited for this amount. Both sides of the accounting equation increase by $50,000, and total debits and credits remain equal.
Some transactions affect only one side of the accounting equation, but the double-entry bookkeeping system nevertheless ensures that the accounting equation remains in balance. For example, if the company pays $30,000 on August 3 to purchase equipment, the cash account's decrease is recorded with a $30,000 credit and the equipment account's increase is recorded with a $30,000 debit. These two asset-account entries offset each other, so the accounting equation remains in balance. Since the cash balance was $50,000 before this transaction occurred, the company has $20,000 in cash after the equipment purchase.
A compound entry is necessary when a single transaction affects three or more accounts. Suppose the company's owner purchases a used delivery truck for $20,000 on August 6 by making a $2,000 cash down payment and obtaining a three-year note payable for the remaining $18,000. This transaction is recorded by debiting (increasing) the vehicles account for $20,000, crediting (increasing) the notes payable account for $18,000, and crediting (decreasing) the cash account for $2,000.
The debits and credits total $20,000, and the accounting equation remains in balance because the $18,000 net increase in assets is matched by an $18,000 increase in liabilities. After these three transactions, the company has $68,000 in assets (cash $18,000; equipment $30,000; vehicles $20,000) and $68,000 in liabilities (notes payable).

Journal Entries

Tracking business activity with T accounts would be cumbersome because most businesses have a large number of transactions each day. These transactions are initially recorded on source documents, such as invoices or checks. The first step in the accounting process is to analyze each transaction and identify what effect it has on the accounts. After making this determination, an accountant enters the transactions in chronological order into a journal, a process called journalizing the transactions. Although many companies use specialized journals for certain transactions, all businesses use a general journal. In this book, the terms general journal and journal are used interchangeably.
The journal's page number appears near the upper right corner. In the example below, GJ1 stands for page 1 of the general journal. Many general journals have five columns: Date, Account Title and Description, Posting Reference, Debit, and Credit.
To record a journal entry, begin by entering the date of the transaction in the journal's date column. For convenience, include the year and month only at the top of each page and next to each month's first entry. In the next column, list each account affected by the transaction on a separate line, and enter a short description of the transaction immediately below the list of accounts. The accounts being debited always appear above the accounts being credited, which are indented slightly. The posting reference column remains blank until the journal entry is transferred to the accounts, a process called posting, at which time the account's number is placed in this column. Finally, enter the debit or credit amount for each account in the appropriate columns on the right side of the journal. Generally, one blank line separates each transaction.

The General Ledger

After journalizing transactions, the next step in the accounting process is to post transactions to the accounts in the general ledger. Although T accounts provide a conceptual framework for understanding accounts, most businesses use a more informative and structured spreadsheet layout. A typical account includes date, explanation, and reference columns to the left of the debit column and a balance column to the right of the credit column. The reference column identifies the journal page containing the transaction. The balance column shows the account's balance after every transaction.
When an account does not have a normal balance, brackets enclose the balance. Assets normally have debit balances, for example, so brackets enclose a checking account's balance only when the account is overdrawn.
As the numbered arrows below indicate, you should post a transaction's first line item to the correct ledger account, completing each column and calculating the account's new balance. Then you should enter the account's reference number in the journal. Repeat this sequence of steps for every account listed in the journal entry.
Referencing the account's number on the journal after posting the entry ensures that every line item that has a reference number in the journal has already been posted. This practice can be helpful if phone calls or other distractions interrupt the posting process.

The Recording Process Illustrated

To understand how to record a variety of transactions, consider the description and analysis of the Greener Landscape Group's first thirteen transactions. Then see how each transaction appears in the company's general journal and general ledger accounts.
Transaction 1: On April 1, 20X2, the owner of the Greener Landscape Group, J. Green, invests $15,000 to open the business. Therefore, an asset account (cash) increases and is debited for $15,000, and the owner's capital account (J. Green, capital) increases and is credited for $15,000.
Notice that the cash account has a debit balance and the J. Green, capital account has a credit balance. Since both balances are normal, brackets are not used. Transaction 2: On April 2, Mr. Green purchases a $15,000 used truck by paying $5,000 in cash and signing a $10,000 note payable, which is due in eighteen months. One asset account (vehicles) increases and is debited for $15,000. Another asset account (cash) decreases and is credited for $5,000. A liability account (notes payable) increases and is credited for $10,000. The shaded areas below provide a reference for the transaction's position in the journal and ledger accounts. They are not part of the current entry.
Transaction 3: On April 3, Mr. Green purchases lawn mowers for $3,000 in cash. One asset account (equipment) increases and is debited for $3,000, and another asset account (cash) decreases and is credited for $3,000.
Transaction 4: On April 5, Mr. Green purchases $30 worth of gasoline to power the mowers during April. Since the gas is a cost of doing business during the present accounting period, an expense account (gas expense) increases and is debited for $30. (Remember: increases in asset, expense, and drawing accounts are made with debit entries.) In addition, an asset account (cash) decreases and is credited for $30.
Transaction 5: On April 5, Mr. Green pays $1,200 for a one-year insurance contract that protects his business from April 1 until March 31 of the following year. Given the length of time this contract is in effect, the matching principle requires that the contract's cost initially be recorded as an asset since it provides a future benefit. Therefore, an asset (prepaid insurance) increases and is debited for $1,200. Another asset account (cash) decreases and is credited for $1,200.
Transaction 6: On April 5, Mr. Green purchases $50 worth of office supplies, placing the purchase on his account with the store rather than paying cash. Supplies are a prepaid expense (an asset) until they are used and thereby become a cost of doing business (an expense). Therefore, an asset account (supplies) increases and is debited for $50. Since Mr. Green places the purchase on his account with the store, a liability account (accounts payable) increases and is credited for $50. Accounts payable differ from notes payable. Accounts payable are amounts the company owes based on the good credit of the company or the owner, whereas notes payable are amounts the company owes under formal obligations.
Transaction 7: On April 14, the Greener Landscape Group cuts grass for seven customers, receiving $50 from each. An asset account (cash) increases and is debited for $350, and a revenue account (lawn cutting revenue) increases and is credited for $350.
Transaction 8: On April 20, Mr. Green receives $270 from a customer for six future maintenance visits. An advance deposit from a customer is an obligation to perform work in the future. It is a liability until the work is performed, at which time it becomes revenue. Therefore, the advance deposit is called unearned revenue. An asset account (cash) increases and is debited for $270, and a liability account (unearned revenue) increases and is credited for $270.
Transaction 9: On April 22, the Greener Landscape Group cuts grass for eight customers, billing each one $50 but receiving no cash. In accordance with the revenue recognition principle, revenue is recognized upon the completion of a service or the delivery of a product, even if no cash changes hands at that time. Therefore, an asset account (accounts receivable) increases and is debited for $400, and a revenue account (lawn cutting revenue) increases and is credited for $400.
Notice the new journal page and the corresponding change in posting references on the accounts. Transaction 10: On April 26, Mr. Green pays $200 in wages to a part-time employee. An expense account (wages expense) increases and is debited for $200, and an asset account (cash) decreases and is credited for $200.
Transaction 11: On April 28, Mr. Green pays $35 to print advertising fliers. An expense account (advertising expense) increases and is debited for $35, and an asset account (cash) decreases and is credited for $35.
Transaction 12: On April 29, Mr. Green withdraws $50 for personal use. The owner's drawing account (J. Green, drawing) increases and is debited for $50, and an asset account (cash) decreases and is credited for $50.
Transaction 13: On April 30, five of the eight previously billed customers each pay $50. Therefore, one asset account (cash) increases and is debited for $250, and another asset account (accounts receivable) decreases and is credited for $250.

The Trial Balance

After posting all transactions from an accounting period, accountants prepare a trial balance to verify that the total of all accounts with debit balances equals the total of all accounts with credit balances. The trial balance lists every open general ledger account by account number and provides separate debit and credit columns for entering account balances. The Greener Landscape Group's trial balance for April 30,20X2 appears below.
The Greener Landscape Group Trial Balance April 30,20X2
Account
Debit
Credit
100
Cash
$ 6,355
110
Accounts Receivable
150
140
Supplies
50
145
Prepaid Insurance
1,200
150
Equipment
3,000
155
Vehicles
15,000
200
Accounts Payable
$ 50
250
Unearned Revenue
270
280
Notes Payable
10,000
300
J. Green, Capital
15,000
350
J. Green, Drawing
50
400
Lawn Cutting Revenue
750
500
Wages Expense
200
510
Gas Expense
30
520
Advertising Expense
35
$26,070
$26,070
Although dollar signs are not used in journals or ledger accounts, trial balances generally include dollar signs next to the first figure in each column and next to each column's total. Trial balances usually include accounts that had activity during the accounting period but have a zero balance at the end of the period.
An error has occurred when total debits on a trial balance do not equal total credits. There are standard techniques for uncovering some of the errors that cause unequal trial balances. After double-checking each column's total to make sure the problem is not simply an addition error on the trial balance, find the difference between the debit and credit balance totals. If the number 2 divides evenly into this difference, look for an account balance that equals half the difference and that incorrectly appears in the column with the larger total. If the Greener Landscape Group's $50 accounts payable balance were mistakenly put in the debit column, for example, total debits would be $100 greater than total credits on the trial balance.
If the number 9 divides evenly into the difference between the debit and credit balance totals, look for a transposition error in one of the account balances. For example, suppose the cash account's balance of $6,355 were incorrectly entered on the trial balance as $6,535. This would cause total debits to be $180 greater than total credits on the trial balance, an amount evenly divisible by 9 ($180 ÷ 9 = $20). Incidentally, the number of digits in the resulting quotient—the quotient 20 has two digits–always indicates that the transposition error begins this number of digits from the right side of an account balance. Also, the value of the leftmost digit in the quotient— 2 in this case— always equals the difference between the two transposed numbers. Test this by transposing any two adjacent numbers in the trial balance and performing the calculations yourself.
If the difference between the debit and credit balance totals is not divisible by 2 or 9, look for a ledger account with a balance that equals the difference and is missing from the trial balance. Of course, two or more errors can combine to render these techniques ineffective, and other types of mistakes frequently occur. If the error is not apparent, return to the ledger and recalculate each account's balance. If the error remains, return to the journal and verify that each transaction is posted correctly.
Some errors do not cause the trial balance's column totals to disagree. For example, the columns in a trial balance agree when transactions are not journalized or when journal entries are not posted to the general ledger. Similarly, recording transactions in the wrong accounts does not lead to unequal trial balances. Another common error a trial balance does not catch happens when a single transaction is posted twice. The trial balance is a useful tool, but every transaction must be carefully analyzed, journalized, and posted to ensure the reliability and usefulness of accounting records.

Adjusting Entries

Before financial statements are prepared, additional journal entries, called adjusting entries, are made to ensure that the company's financial records adhere to the revenue recognition and matching principles. Adjusting entries are necessary because a single transaction may affect revenues or expenses in more than one accounting period and also because all transactions have not necessarily been documented during the period.
Each adjusting entry usually affects one income statement account (a revenue or expense account) and one balance sheet account (an asset or liability account). For example, suppose a company has a $1,000 debit balance in its supplies account at the end of a month, but a count of supplies on hand finds only $300 of them remaining. Since supplies worth $700 have been used up, the supplies account requires a $700 adjustment so assets are not overstated, and the supplies expense account requires a $700 adjustment so expenses are not understated.
Adjustments fall into one of five categories: accrued revenues, accrued expenses, unearned revenues, prepaid expenses, and depreciation.

Accrued Revenues

An adjusting entry to accrue revenues is necessary when revenues have been earned but not yet recorded. Examples of unrecorded revenues may involve interest revenue and completed services or delivered goods that, for any number of reasons, have not been billed to customers. Suppose a customer owes 6% interest on a three-year, $10,000 note receivable but has not yet made any payments. At the end of each accounting period, the company recognizes the interest revenue that has accrued on this long-term receivable.
Unless otherwise specified, interest is calculated with the following formula: principal x annual interest rate x time period in years.
Most textbooks use a 360-day year for interest calculations, which is done here. In practice, however, most lenders make more precise calculations by using a 365-day year.
Since the company accrues $50 in interest revenue during the month, an adjusting entry is made to increase (debit) an asset account (interest receivable) by $50 and to increase (credit) a revenue account (interest revenue) by $50.
If a plumber does $90 worth of work for a customer on the last day of April but doesn't send a bill until May 4, the revenue should be recognized in April's accounting records. Therefore, the plumber makes an adjusting entry to increase (debit) accounts receivable for $90 and to increase (credit) service revenue for $90.
Accounting records that do not include adjusting entries for accrued revenues understate total assets, total revenues, and net income.

Accrued Expenses

An adjusting entry to accrue expenses is necessary when there are unrecorded expenses and liabilities that apply to a given accounting period. These expenses may include wages for work performed in the current accounting period but not paid until the following accounting period and also the accumulation of interest on notes payable and other debts.
Suppose a company owes its employees $2,000 in unpaid wages at the end of an accounting period. The company makes an adjusting entry to accrue the expense by increasing (debiting) wages expense for $2,000 and by increasing (crediting) wages payable for $2,000.
If a long-term note payable of $10,000 carries an annual interest rate of 12%, then $1,200 in interest expense accrues each year. At the close of each month, therefore, the company makes an adjusting entry to increase (debit) interest expense for $100 and to increase (credit) interest payable for $100.
Accounting records that do not include adjusting entries for accrued expenses understate total liabilities and total expenses and overstate net income.

Unearned Revenues

Unearned revenues are payments for future services to be performed or goods to be delivered. Advance customer payments for newspaper subscriptions or extended warranties are unearned revenues at the time of sale. At the end of each accounting period, adjusting entries must be made to recognize the portion of unearned revenues that have been earned during the period.
Suppose a customer pays $1,800 for an insurance policy to protect her delivery vehicles for six months. Initially, the insurance company records this transaction by increasing an asset account (cash) with a debit and by increasing a liability account (unearned revenue) with a credit. After one month, the insurance company makes an adjusting entry to decrease (debit) unearned revenue and to increase (credit) revenue by an amount equal to one sixth of the initial payment.
Accounting records that do not include adjusting entries to show the earning of previously unearned revenues overstate total liabilities and understate total revenues and net income.
Prepaid Expenses
Prepaid expenses are assets that become expenses as they expire or get used up. For example, office supplies are considered an asset until they are used in the course of doing business, at which time they become an expense. At the end of each accounting period, adjusting entries are necessary to recognize the portion of prepaid expenses that have become actual expenses through use or the passage of time.
Consider the previous example from the point of view of the customer who pays $1,800 for six months of insurance coverage. Initially, she records the transaction by increasing one asset account (prepaid insurance) with a debit and by decreasing another asset account (cash) with a credit. After one month, she makes an adjusting entry to increase (debit) insurance expense for $300 and to decrease (credit) prepaid insurance for $300.
Prepaid expenses in one company's accounting records are often—but not always—unearned revenues in another company's accounting records. Office supplies provide an example of a prepaid expense that does not appear on another company's books as unearned revenue.
Accounting records that do not include adjusting entries to show the expiration or consumption of prepaid expenses overstate assets and net income and understate expenses.

Depreciation

Depreciation is the process of allocating the depreciable cost of a long-lived asset, except for land which is never depreciated, to expense over the asset's estimated service life. Depreciable cost includes all costs necessary to acquire an asset and make it ready for use minus the asset's expected salvage value, which is the asset's worth at the end of its service life, usually the amount of time the asset is expected to be used in the business. For example, if a truck costs $30,000, has an expected salvage value of $6,000, and has an estimated service life of sixty months, then $24,000 is allocated to expense at a rate of $400 each month ($24,000 ÷ 60 = $400). This method of calculating depreciation expense, called straight-line depreciation, is the simplest and most widely used method for financial reporting purposes.
Some accountants treat depreciation as a special type of prepaid expense because the adjusting entries have the same effect on the accounts. Accounting records that do not include adjusting entries for depreciation expense overstate assets and net income and understate expenses. Nevertheless, most accountants consider depreciation to be a distinct type of adjustment because of the special account structure used to report depreciation expense on the balance sheet.
Since the original cost of a long-lived asset should always be readily identifiable, a different type of balance-sheet account, called a contra-asset account, is used to record depreciation expense. Increases and normal balances appear on the credit side of a contraasset account. The net book value of long-lived assets is found by subtracting the contra-asset account's credit balance from the corresponding asset account's debit balance. Do not confuse book value with market value. Book value is the portion of the asset's cost that has not been written off to expense. Market value is the price some-one would pay for the asset. These two values are usually different.
Suppose an accountant calculates that a $125,000 piece of equipment depreciates by $1,000 each month. After one month, he makes an adjusting entry to increase (debit) an expense account (depreciation expense–equipment) by $1,000 and to increase (credit) a contra-asset account (accumulated depreciation–equipment) by $1,000.
On a balance sheet, the accumulated depreciation account's balance is subtracted from the equipment account's balance to show the equipment's net book value.
ACME Manufacturing Partial Balance Sheet December 31, 20X7
Property, Plant, and Equipment
    Equipment
125,000
    Less: Accumulated Depreciation
(1,000)
124,000

The Adjustment Process Illustrated

Accountants prepare a trial balance both before and after making adjusting entries. Reexamine the Greener Landscape Group's unadjusted trial balance for April 30, 20X2.
Account
Debit
Credit
100
Cash
$ 6,355
110
Accounts Receivable
150
140
Supplies
50
145
Prepaid Insurance
1,200
150
Equipment
3,000
155
Vehicles
15,000
200
Accounts Payable
$ 50
250
Unearned Revenue
270
280
Notes Payable
10,000
300
J. Green, Capital
15,000
350
J. Green, Drawing
50
400
Lawn Cutting Revenue
750
500
Wages Expense
200
510
Gas Expense
30
520
Advertising Expense
35
$26,070
$26,070
Consider eight adjusting entries recorded in Mr. Green's general journal and posted to his general ledger accounts. Then, see the adjusted trial balance, which shows the balance of all accounts after the adjusting entries are journalized and posted to the general ledger accounts.
Adjustment A: During the afternoon of April 30, Mr. Green cuts one lawn, and he agrees to mail the customer a bill for $50, which he does on May 2. In accordance with the revenue recognition principle, Mr. Green makes an adjusting entry in April to increase (debit) accounts receivable for $50 and to increase (credit) lawn cutting revenue for $50.
Adjustment B: Mr. Green's $10,000 note payable, which he signed on April 2, carries a 10.2% interest rate. Interest calculations usually exclude the day that loans occur and include the day that loans are paid off. Therefore, Mr. Green uses the formula below to calculate how much interest expense accrued during the final twenty-eight days of April.
Since the matching principle requires that expenses be reported in the accounting period to which they apply, Mr. Green makes an adjusting entry to increase (debit) interest expense for $79 and to increase (credit) interest payable for $79.
Adjustment C: Mr. Green's part-time employee earns $80 during the last four days of April but will not be paid until May 10. This requires an adjusting entry that increases (debits) wages expense for $80 and that increases (credits) wages payable for $80.
Adjustment D: On April 20 Mr. Green received a $270 prepayment for six future visits. Assuming Mr. Green completed one of these visits in April, he must make a $45 adjusting entry to decrease (debit) unearned revenue and to increase (credit) lawn cutting revenue.
Adjustment E: Mr. Green discovers that he used $25 worth of office supplies during April. He therefore makes a $25 adjusting entry to increase (debit) supplies expense and to decrease (credit) supplies.
Adjustment F: Mr. Green must record the expiration of one twelfth of his company's insurance policy. Since the annual premium is $1,200, he makes a $100 adjusting entry to increase (debit) insurance expense and to decrease (credit) prepaid insurance.
Adjustment G: If depreciation expense on Mr. Green's $15,000 truck is $200 each month, he makes a $200 adjusting entry to increase (debit) an expense account (depreciation expense–vehicles) and to increase (credit) a contra-asset account (accumulated depreciation–vehicles).
The truck's net book value is now $14,800, which is calculated by subtracting the $200 credit balance in the accumulated depreciation–vehicles account from the $15,000 debit balance in the vehicles account. Many accountants calculate the depreciation of long-lived assets to the nearest month. Had Mr. Green purchased the truck on April 16 or later, he might not make this adjusting entry until the end of May.
Adjustment H: If depreciation expense on Mr. Green's equipment is $35 each month, he makes a $35 adjusting entry to increase (debit) depreciation expense–equipment and to increase (credit) accumulated depreciation–equipment.
After journalizing and posting all of the adjusting entries, Mr. Green prepares an adjusted trial balance. The Greener Landscape Group's adjusted trial balance for April 30,20X2 appears below.
The Greener Landscape Group Adjusted Trial Balance April 30,20X2
Account
Debit
Credit
100
Cash
$ 6,355
110
Accounts Receivable
200
140
Supplies
25
145
Prepaid Insurance
1,100
150
Equipment
3,000
151
Accumulated Depreciation–Equipment
$ 35
155
Vehicles
15,000
156
Accumulated Depreciation–Vehicles
200
200
Accounts Payable
50
210
Wages Payable
80
220
Interest Payable
79
250
Unearned Revenue
225
280
Notes Payable
10,000
300
J. Green, Capital
15,000
350
J. Green, Drawing
50
400
Lawn Cutting Revenue
845
500
Wages Expense
280
510
Gas Expense
30
520
Advertising Expense
35
530
Interest Expense
79
540
Supplies Expense
25
545
Insurance Expense
100
551
Depreciation Expense–Equipment
35
556
Depreciation Expense–Vehicles
200
$26,514
$26,514

Financial Statements

Financial statements are prepared immediately after the adjusted trial balance. Knowing how to record transactions, make adjusting entries, and create trial balances gives you a greater under-standing of the information financial statements contain.
Income statement. The income statement, which is sometimes called the statement of earnings or statement of operations, lists all revenue and expense account balances and shows the company's net income or net loss for a particular period of time. This statement may be prepared using a single-step or multiple-step format. The single-step format puts revenue and expense accounts into separate groups. Then, total expenses are subtracted from total revenues to determine the net income or loss.
The Greener Landscape Group Income Statement For the Month Ended April 30,20X2
Revenues
    Lawn Cutting Revenue
$845
Expenses
    Wages Expense
$280
    Depreciation Expense–Vehicles
200
    Insurance Expense
100
    Interest Expense
79
    Depreciation Expense–Equipment
35
    Advertising Expense
35
    Gas Expense
30
    Supplies Expense
25
      Total Expenses
784
Net Income
$ 61
The multiple-step format uses the same accounts and balances but separates the cost of services provided from operating expenses and also includes a category for other types of income and expense.
The Greener Landscape Group Income Statement For the Month Ended April 30,20X2
Revenues
    Lawn Cutting Revenue
$845
Cost of Services Provided
    Wages Expense
$280
    Depreciation Expense–Vehicles
200
    Insurance Expense
100
    Depreciation Expense–Equipment
35
    Gas Expense
30
      Total Cost of Services Provided
645
Gross Profit
200
Operating Expenses
    Advertising Expense
35
    Supplies Expense
25
      Total Operating Expenses
60
Operating Income
140
Other Income/(Expense), Net
    Interest Expense
(79)
Net Income
$ 61
Companies may use slightly different categories for expenses, but the overall structure for this type of income statement is essentially the same. For example, merchandising companies include a category for the cost of goods sold, and many companies break operating expenses into two subcategories: selling expenses and general and administrative expenses
Statement of owner's equity. The statement of owner's equity shows activity in the owner's equity accounts for a particular period of time. The capital account's opening balance is followed by a list of increases and decreases, and the account's closing balance is calculated from this information. Increases include investments made by the owner and net income. Decreases include owner withdrawals and net loss. Since the income statement already shows all revenue and expense account balances, only the company's net income or loss appears on this statement.
The Greener Landscape Group Statement of Owner's Equity For the Month Ended April 30,20X2
J. Green, Capital, April 1
$ 0
Additions
    Investments
$15,000
    Net Income
61
15,061
Withdrawals
(50)
J. Green, Capital, April 30
$15,011
Balance sheet. The balance sheet lists the asset, liability, and owner's equity balances at a specific time. It proves that the accounting equation (Assets = Liabilities + Owner's Equity) is in balance. The ending balance on the statement of owner's equity is used to report owner's equity on the balance sheet.
The Greener Landscape Group Balance Sheet April 30,20X2
Assets
    Cash
$ 6,355
    Accounts Receivable
200
    Supplies
25
    Prepaid Insurance
1,100
    Vehicles
$15,000
    Less: Accumulated Depreciation
(200)
    Equipment
3,000
    Less: Accumulated Depreciation
(35)
17,765
      Total Assets
$25,445
Liabilities and Owner's Equity
Liabilities
    Accounts Payable
$ 50
    Wages Payable
80
    Interest Payable
79
    Unearned Revenue
225
    Notes Payable
10,000
      Total Liabilities
10,434
Owner's Equity
    J. Green, Capital
15,011
      Total Liabilities and Owner's Equity
$25,445
To aid readers, most companies prepare a classified balance sheet, which categorizes assets and liabilities. The standard asset categories on a classified balance sheet are current assets; property, plant, and equipment; long-term investments; and intangible assets. Liabilities are generally divided into current liabilities and long-term liabilities.
The Greener Landscape Group Balance Sheet April 30,20X2
ASSETS
Current Assets
    Cash
$ 6,355
    Accounts Receivable
200
    Supplies
25
    Prepaid Insurance
1,100
      Total Current Assets
7,680
Property, Plant, and Equipment
    Vehicles
$15,000
    Less: Accumulated Depreciation
(200)
$14,800
    Vehicles
3,000
    Less: Accumulated Depreciation
(35)
2,965
17,765
      Total Assets
$25,445
LIABILITIES AND OWNER'S EQUITY
Current Liabilities
    Accounts Payable
$ 50
    Wages Payable
80
    Interest Payable
79
    Unearned Revenue
225
      Total Current Liabilities
434
Long-Term Liabilities
    Notes Payable
10,000
      Total Liabilities
10,434
Owner's Equity
    J. Green, Capital
15,011
      Total Liabilities and Owner's Equity
$25,445
Statement of cash flows. The statement of cash flows places all cash exchanges into one of three categories—operating, investing, or financing—to calculate the net change in cash during the accounting period. Operating cash flows arise from day-to-day business operations such as inventory purchases, sales revenue, and payroll expenses. Note that interest and dividends received from long-term assets (investing activities) and interest payments for long-term loans (financing activities) appear on the income statement, so they would appear as operating cash flows on the statement of cash flows. Income taxes are also included with operating cash flows. Investing cash flows relate to cash exchanges involving long-term assets, such as the purchase or sale of land, buildings, equipment, or long-term investments in another company's stock or debt. Financing cash flows involve changes in long-term liabilities and owner's equity. Examples include the receipt or early retirement of long-term loans, the sale or repurchase of stock, and the payment of dividends to shareholders.
The Greener Landscape Group Statement of Cash Flows For the Month Ended April 30,20X2
Cash Flows from Operating Activities
    Cash from Customers
$ 870
    Cash to Employees
(200)
    Cash to Suppliers
(1,265)
      Cash Flow Used by Used by Operating Activities
(595)
Cash Flows from Investing Activities
    Purchase of Vehicle
(5,000)
    Purchase of Equipment
(3,000)
      Cash Flow Used by Investing Activities
(8,000)
Cash Flows from Financing Activities
    Investment by Owner
15,000
    Withdrawal by Owner
(50)
      Cash Flow Provided by Financing Activities
14,950
Net Increase in Cash
6,355
Beginning Cash, April 1
0
Ending Cash, April 30
$ 6,355
As its name implies, this statement focuses on cash flows rather than income. For example, the $870 Mr. Green receives from customers includes unearned revenues and excludes accounts receivable. At the bottom of the statement, the net increase or decrease in cash is used to reconcile the accounting period's beginning and ending cash balances. Significant noncash transactions likely to impact cash flow in other accounting periods must also be disclosed, but this does not occur in the body of the statement. The footnote in the illustration shows one way to accomplish such disclosures.
According to current accounting standards, operating cash flows may be disclosed using either the direct or the indirect method. The direct method simply lists operating cash flows by type of cash receipt and payment. The direct method is straightforward and easy to interpret, but only a small percentage of companies actually use this method. The indirect method reports operating cash flows by listing the company's net income or loss and then adjusting this figure because net income is not calculated on the cash basis.

The Work Sheet

Many accountants use a work sheet to prepare the unadjusted trial balance, to assign the adjusting entries to the correct accounts, to create the adjusted trial balance, and then to prepare preliminary financial statements. A work sheet is an optional step in the accounting cycle. It is an informal document that is not considered a financial statement, although it gives management some information about results for a period. Work sheets usually have five sets of debit and credit columns, which are completed from left to right one set at a time. Have a look at the following Greener Landscape Group's work sheet for the month of April.
Use the first set of columns to prepare a trial balance. List all open accounts on the left side of the work sheet and enter each account's debit or credit balance in the appropriate columns immediately to the right.
The second set of columns shows how the adjusting entries affect the accounts. While completing these columns, list additional accounts as needed along the left side of the work sheet. Use a letter to index the debit and credit portion of each adjusting entry so that, latter, it is easier to journalize and post the adjustments. An explanation of each adjustment may be written at the bottom of the work sheet. If an account has more than one adjustment, each is shown separately, using as many lines as necessary. After entering all the adjustments on the work sheet, make sure the column totals are equal.
The third set of columns contains the adjusted trial balance. The adjusted account balances in these columns equal the sum of the trial balance and adjustments columns. Consider the first three accounts on the Greener Landscape Group's work sheet. Since no adjustments affect the cash account, that account's debit balance carries across to the debit column of the adjusted trial balance. Accounts receivable begins with a $150 debit balance and has a $50 debit in the adjustments column. These amounts combine to give the account a $200 debit balance in the adjusted trial balance. In the supplies account, a $50 debit balance combines with a $25 credit in the adjustments column to yield a $25 debit balance. Although each individual account works this way, the totals at the bottom of the trial balance and adjustments columns cannot be combined to determine the column totals at the bottom of the adjusted trial balance—adding $26,070 to $614 clearly does not yield $26,514. After entering each balance in the work sheet's adjusted trial balance, total each column to make sure the debits and credits are equal.
Each account's adjusted trial balance transfers directly to either the fourth or fifth set of columns. Move all revenue and expense account balances to the income statement columns, and move all other account balances (assets, liabilities, owner's capital, and owner's drawing) to the balance sheet columns. Then total each of the final four columns. Unless net income is zero, the columns have unequal debit and credit totals. If total credits are greater than total debits in the income statement columns, the company has net income, and the difference between these columns is added to the work sheet's income statement debit column and balance sheet credit column on a line labeled Net Income. The difference is added to the balance sheet credit column because net income increases owner's equity, and increases to owner's equity are recorded with credits. If total debits are greater than total credits in the income statement columns, a net loss occurs, and the difference between these column totals is added to the work sheet's income statement credit column and balance sheet debit column on a line labeled Net Loss. Once the company's net income or net loss is added to the correct income statement and balance sheet columns, each set of debit and credit columns balance, and the work sheet is complete.
Prepare the income statement, statement of owner's equity, and balance sheet from the completed work sheet. The accounts and balances in the work sheet's income statement columns transfer directly to the income statement, which is prepared first. Next, from the work sheet's balance sheet columns, use the owner's capital and drawing account balances and the company's net income or loss to complete the statement of owner's equity. Complete the balance sheet last. When preparing the balance sheet, be careful not to use the capital account balance on the work sheet because it shows the capital account's beginning balance for the accounting period. Instead, use the ending balance on the statement of owner's equity, which has already adjusted the capital account's balance to reflect the company's net income or loss and any withdrawals made by the owner. After the financial statements are prepared, the adjusting entries are journalized and posted.
The Greener Landscape Group Work Sheet For the Month Ended April 30,20X2
Trial Balance
Adjustments
Adusted Trial Balance
Income Statement
Balance Sheet
Dr. Cr.
Dr. Cr.
Dr. Cr.
Dr. Cr.
Dr. Cr.
Dr. Cr.
Dr. Cr.
Dr. Cr.
Dr. Cr.
Dr. Cr.
Cash
6,355
6,355
6,355
Accounts Receivable
150
50 (a)
200
200
Supplies
50
25 (e)
25
25
Prepaid Insurance
1,200
100 (f)
1,100
1,100
Equipment
3,000
3,000
3,000
Vehicles
15,000
15,000
15,000
Accounts Payable
50
50
50
Uneamed Revenue
270
45 (d)
225
225
Notes Payable
10,000
10,000
10,000
J. Green, Capital
15,000
15,000
15,000
J. Green, Drawing
50
50
50
Lawn Cutting Revenue
750
50 (a)
845
845
45 (d)
Wages Expense
200
80 (c)
280
280
Gas Expense
30
30
30
Advertising Expense
35
35
35
    Totals
26,070
26,070
Interest Expense
79 (b)
79
79
Interest Payable
79 (b)
79
79
Wages Payable
80 (c)
80
80
Supplies Expense
25 (e)
25
25
Insurance Expense
100 (f)
100
100
Depreciation Expense–Vehicles
200 (g)
200
200
Accumulated Depreciation–Vehicles
200 (g)
200
200
Depreciation Expense–Equipment
35 (h)
35
35
Accumulated Depreciation–Equipment
35 (h)
35
35
    Totals
614
614
26,514
26,514
784
845
25,730
25,669
Net Income
61
61
    Totals
845
845
25,730
25,730

Closing Entries

To update the balance in the owner's capital account, accountants close revenue, expense, and drawing accounts at the end of each fiscal year or, occasionally, at the end of each accounting period. For this reason, these types of accounts are called temporary or nominal accounts. Assets, liabilities, and the owner's capital account, in contrast, are called permanent or real accounts because their ending balance in one accounting period is always the starting balance in the subsequent accounting period. When an accountant closes an account, the account balance returns to zero. Starting with zero balances in the temporary accounts each year makes it easier to track revenues, expenses, and withdrawals and to compare them from one year to the next. There are four closing entries, which transfer all temporary account balances to the owner's capital account
1.      Close the income statement accounts with credit balances (normally revenue accounts) to a special temporary account named income summary.
2.      Close the income statement accounts with debit balances (normally expense accounts) to the income summary account. After all revenue and expense accounts are closed, the income summary account's balance equals the company's net income or loss for the period.
3.      Close income summary to the owner's capital account or, in corporations, to the retained earnings account. The purpose of the income summary account is simply to keep the permanent owner's capital or retained earnings account uncluttered.
4.      Close the owner's drawing account to the owner's capital account. In corporations, this entry closes any dividend accounts to the retained earnings account. For purposes of illustration, closing entries for the Greener Landscape Group follow.
Closing entry 1: The lawn cutting revenue account is Mr. Green's only income statement account with a credit balance. Debit this account for an amount equal to the account's balance, and credit income summary for the same amount.
Closing entry 2: Mr. Green has eight income statement accounts with debit balances; they are all expense accounts. Close these accounts by debiting income summary for an amount equal to the combined debit balances of all eight expense accounts and by crediting each expense account for an amount equal to its own debit balance.
Closing entry 3: The income summary account's $61 credit balance equals the company's net income for the month of April. To close income summary, debit the account for $61 and credit the owner's capital account for the same amount.
In partnerships, a compound entry transfers each partner's share of net income or loss to their own capital account. In corporations, income summary is closed to the retained earnings account.
Closing entry 4: Mr. Green's drawing account has a $50 debit balance. To close the account, credit it for $50 and debit the owner's capital account for the same amount.
In a partnership, separate entries are made to close each partner's drawing account to his or her own capital account. If a corporation has more than one class of stock and uses dividend accounts to record dividend payments to investors, it usually uses a separate dividend account for each class. If this is the case, the corporation's accounting department makes a compound entry to close each dividend account to the retained earnings account

The Post‐Closing Trial Balance

After the closing entries are journalized and posted, only permanent, balance sheet accounts remain open. A post-closing trial balance is prepared to check the clerical accuracy of the closing entries and to prove that the accounting equation is in balance before the next accounting period begins.
The Greener Landscape Group Post-Closing Trial Balance April 30, 20X2
Account
Debit
Credit
100
Cash
$ 6,355
110
Accounts Receivable
200
140
Supplies
25
145
Prepaid Insurance
1,100
150
Equipment
3,000
151
Accumulated Depreciation–Equipment
$ 35
155
Vehicles
15,000
156
Accumulated Depreciation-Vehicles
200
200
Accounts Payable
50
210
Wages Payable
80
220
Interest Payable
79
250
Unearned Revenue
225
280
Notes Payable
10,000
300
J. Green, Capital
15,011
$25.680
$25,680
Since there are several types of errors that trial balances fail to uncover, each closing entry must be journalized and posted carefully.

Reversing Entries

At the beginning of each accounting period, some accountants use reversing entries to cancel out the adjusting entries that were made to accrue revenues and expenses at the end of the previous accounting period. Reversing entries make it easier to record subsequent transactions by eliminating the need for certain compound entries.
Suppose Mr. Green makes an adjusting entry at the end of April to account for $80 in unpaid wages. This adjustment involves an $80 debit to the wages expense account and an $80 credit to the wages payable account.
If Mr. Green does not reverse the adjusting entry, he must remember that part of May's first payroll payment (for work completed in April) has already been recorded in the wages payable and wages expense accounts. Assuming Mr. Green pays $200 in wages on May 10, he makes a compound entry that decreases (debits) wages payable to $0, increases (debits) wages expense by an amount equal to the wage expenses for May 1 through May 10, and decreases (credits) cash for an amount equal to the total payment.
To avoid the need for a compound entry, Mr. Green may choose to reverse the April 30 adjustment for accrued wages when the May accounting period begins. The reversing entry decreases (debits) wages payable for $80 and decreases (credits) wages expense for $80.
If the reversing entry is made, the May 10 payroll payment can be recorded with a simple entry that increases (debits) wages expense for $200 and decreases (credits) cash for $200.
Between May 1 when the reversing entry is made and May 10 when the payroll entry is recorded, the company's total liabilities and total expenses are understated. This temporary inaccuracy in the books is acceptable only because financial statements are not prepared during this period.
When the temporary accounts are closed at the end of an accounting period, subsequent reversing entries create abnormal balances in the affected expense and revenue accounts. For example, if the wages expense account is closed on April 30, a reversing entry on May 1 creates a credit balance in the account. The credit balance is offset by the May 10 debit entry, and the account balance then shows current period expenses.

Correcting Entries

Accountants must make correcting entries when they find errors. There are two ways to make correcting entries: reverse the incorrect entry and then use a second journal entry to record the transaction correctly, or make a single journal entry that, when combined with the original but incorrect entry, fixes the error.
After making a credit purchase for supplies worth $50 on April 5, suppose Mr. Green accidently credits accounts receivable instead of accounts payable.
Mr. Green discovers the error on May 2, after receiving a bill for the supplies. He may use two entries to fix the error: one that reverses the incorrect entry by debiting accounts receivable for $50 and crediting supplies for $50, and another that records the transaction correctly by debiting supplies for $50 and crediting accounts payable for $50.
Or Mr. Green can fix the error with a single entry that debits accounts receivable for $50 and credits accounts payable for $50.
TASRON,SPd,M.Pd
Guru Akuntansi
SMANegeri 1 Kraksaan

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