Accounting Rules to Remember

1. Accounting Rules to Remember Georgia CTAE Resource Network Instructional Resources Office Written by: Dr. Marilynn K. Skinner May 2009

2. The Accounting Equation Assets = Liabilities + Owner’s Equity Or Liabilities = Assets – Owner’s Equity Or Owner’s Equity = Assets - Liabilities

3. Debits and Credits In any transaction: Debits = Credits

4. Steps in Analyzing a Transaction • Determine the accounts affected • Will the accounts be increased or decreased • Does the increase/decrease require a debit or a credit • Do debits = credits

5. Example Quinn Corporation paid their April rent, $1,450, to Thomas Real Estate • What accounts would be affected? Rent Expense Cash

6. Example Quinn Corporation paid their April rent, $1,450, to Thomas Real Estate 2. Will the accounts be increased or decreased? Rent Expense – Increased Cash - Decreased

7. Example Quinn Corporation paid their April rent, $1,450, to Thomas Real Estate 3. Does the increase/decrease require a debit or a credit? Rent Expense Increases with a debit Cash decreases with a credit

8. Example 4. Do debits = credits General Journal

9. Steps in the Accounting Cycle Steps 1-5 • Collect source documents • Analyze each transaction • Journalize each transaction • Post to general and subsidiary ledgers • Prepare a trial balance

10. Steps in the Accounting Cycle Steps 6-10 • Gather adjusting information and prepare worksheet • Prepare financial statements • Journalize and post adjusting entries • Journalize and post closing entries • Prepare a port-closing trial balance

11. Steps in the Closing Process • Close revenues to income summary • Close expenses to income summary • Close income summary to capital • Close draw to capital

12. When your trial balance doesn’t balance Try these steps – • Add your columns again from bottom to top. • Calculate the difference in your columns • Divide your difference by 9, if it divides evenly, you have a transposition (entering 123 rather than 132) or a slide, (entering 100 rather than 10)

13. When your trial balance doesn’t balance • Look for an amount that is the amount of the difference. • Look for an amount that is ½ the difference ( you put a debit as a credit or a credit as a debit)

14. When your trial balance doesn’t balance • Check for the preceding amounts in this order: • Check that you wrote down the totals from the ledger correctly on the trial balance, checking not only the amount but that debits are recorded as debits and credits as credits. • Retotal you ledger accounts • Retotal your journals • Check journal entries against ledger postings.

15. And other rules Assets when they are used up become expenses The Balance Sheet contains only permanent accounts ( the balances never go to 0). The Income Statement Contains only the temporary accounts (balances are brought to 0 every month). Adjusting entries always affect both a balance sheet and an income statement account

16. And other rules Order of accounts in the general ledger: Assets Liabilities Owner’s capital Owner’s draw Revenue Expenses This is also the order of accounts in the trial balance

17. Financial Statements The Balance Sheet Reflects the accounting equation by proving that assets = liabilities + owner’s equity Dated for a specific date

18. Financial Statements The income statement reflects the activities of the current accounting period. Format: Revenues – Expenses = Net Income

19. Financial Statements Statement of Owner’s Equity Ties the Income Statement and Balance Sheet together by showing the effect of the period activity on the balance sheet. Beginning Owner’s Equity + Net Income (Loss) = Ending Owner’s Equity From Income Statement To Balance Sheet