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John Han，a professor，stated that in the computer world one computer database of business events is enough for all reporting purposes，such as accounting，marketing，and production.Accountants can prepare financial reports upon the information directly abstracted from database.It is no longer necessary to record business events in sequential order as it has been traditionally done in accounting journals.What advantages and disadvantages do you think this proposal has？
The accounting information system must capture the relevant data about the entity's transactions，categorize them，and store them in such a way that one can retrieve the information and prepare the financial statements of the entity.This process is called the accounting cycle，or the accounting process.This chapter focuses on manual，rather than computer-based，accounting cycle，because the computer does not change the fundamental nature of how transaction data are collected，processed，and assimilated into a set of financial statements.
The accounting equation states that assets equal liabilities plus equity（Assets=Liabilities+Equity）.This equation will always hold as long as no error has been made.This equation is the basis of double-entry bookkeeping system，and the basis of the statement of financial position.
For example，consider the transactions for Linda Future，Inc.given in Table 4-1.The owners invest cash of $ 10 000 to start the company.Thus the company has an asset of $ 10 000，and equity of the same amount.Assets equal liabilities plus equity.
Table 4-1 Transactions and Accounting Equation
The company purchases equipment of $ 5 000 on credit.The transaction increases equipment by $ 5 000，and increases liabilities by $ 5 000.Total assets are now $ 15 000，total liabilities are $ 5 000，and equity remains $ 10 000.The accounting equation remains valid.
The second transaction is issuing common stock for $ 20 000.The cash and common stock increase by $ 20 000.Again，the accounting equation holds.
The third transaction is paying $ 1 000 for supplies.The transaction increases supplies by $ 1 000，and decreases cash by $ 1 000.It doesn't change total assets，total liabilities，or equity.
The forth transaction is paying $ 3 000 of its debts.The cash and debts decrease by $ 3 000.Again，the accounting equation holds.
Preparation of financial statements requires that information about an organization's economic events be captured and recorded in a rational and systematic manner.The origins of modern accounting，the double-entry bookkeeping system，can be traced to a mathematic book written in 1494 by Luca Pacioli living in what is now Italy.The fundamental rule of double-entry bookkeeping is that debits must equal credits.
Debits and Credits
Debits and credits are accounting terms with specialized meanings.Essentially，the term“debit”and“credit”means left and right respectively.A T-account is used to illustrate the use of debits and credits.A T-account is not really part of any formal accounting system；it is a device used for illustrative or analytical purposes，whose name is derived from its shape.The following illustration is a T-account for cash.
When debit is used as a noun，it refers to an amount entered on the left-hand side of an accounting record，such as a T-account.Debit can also be used as a verb，meaning to enter a given amount on the left-hand side of an accounting record.The term credit is similar with the term debit whereas it refers to the right-hand side.The debit/credit rules can be correlated with the accounting equation.Assets appear on the left-hand side of the accounting equation.To increase an asset，it must be debited，with the appropriate amount being entered on the left-hand side of the account.Liabilities and equity appear on the right-hand side of the accounting equation.An increase in one of these accounts means that the appropriate amount is credited or entered on the right-hand side of the account.
As an entity begins its operations，two additional account types are used：revenues and expenses.Revenues cause equity to increase and because increases in equity are shown as credits，revenues also increase with credits.Alternatively，expenses cause equity to decrease，and decreases in equity are shown as debits.The more expenses an entity has，the smaller equity becomes.Thus，expenses increase with debits.The expanded accounting equation is as following：
Assets=Liabilities + Equity +（Revenues-Expenses）
The normal balance of each account is on the side where increases are recorded.Thus，assets and expenses normally have debit balances；liabilities，equity，and revenues typically have credit balances.Table 4-2 summarizes the debit and credit relationships of accounts.
Table 4-2 Debit and Credit Relationships of Accounts
A few accounts，which are designed to show offsets to other related accounts，are referred to as contra-accounts and have opposite balances.For example，contra-assets such as accumulated depreciation and allowance for doubtful accounts have credit balances.Contra-revenues such as sales discount，sales returns and allowances have debit balances.
Accounting reports should be prepared on a periodic basis.Therefore，while one accounting cycle ends at the close of an operating period，another cycle begins for the next period.There are four steps to the accounting cycle.
Step 1：Collect，examine and process transactions.
●prepare journal entries for the transactions.
●post journal entries to the general ledger.
●prepare a trial balance.
Step 2：Adjust account balances as necessary.
●record adjustments in the general journal.
●post adjustments to the general ledger.
●prepare an adjusted trial balance.
Step 3：Prepare financial statements.
●statement of comprehensive income.
●statement of changes in equity.
●statement of financial position.
●statement of cash flows.
Step 4：Close temporary accounts.
●record closing entries in the general journal.
●post closing entries to the general ledger.
●prepare a post-closing trial balance.
1.Prepare Journal Entries for the Transactions
To gather the information needed to prepare a general journal entry，business transactions must be analyzed to determine the accounts affected and the amounts of those effects.The format of a general journal is as Table 4-3.
Table 4-3
The first column records the date of the transaction.The second column gives the names of accounts that are affected by the transaction；debits are entered before the credits，followed by a brief description of the transaction.The third column is called posting reference（PR）column.Debits and credits make up the fourth and fifth columns where the amount entered.
Illustration
Let's suppose that company Mars starts its business.The following transactions take place in its first month，June of the year.These transactions are recorded in the general journal as shown in Table 4-4.
Table 4-4 Mars General Journal
June 1：Mars issues 3 000 shares of $ 10 par value common stock.Checks totaling $ 30 000 are received from the stockholders.
June 1：Mars purchases furniture costing $ 24 000，paying $ 6 000 in cash and the balance is due in six months.The furniture is expected to have a four-year useful life with no salvage value.
June 3：Mars pays $ 12 000 for one year's rent of office space.
June 5：Mars purchases $ 18 000 of inventory on credit.
June 9：Mars pays off $ 8 000 of the debt incurred on June 5.
June 15：Cash sales are made for $ 15 000.
June 18：Mars pays two-week wages of $ 800 to the employees.
June 20：Credit sales are made for $ 10 000.
June 28：Customers pay $ 7 000 of accounts receivable originating from June 20.
June 30：Mars receives and pays the $ 300 electricity bill for June.
June 30：Mars declares and pays a cash dividend of $ 400.
2.Post Journal Entries to the General Ledger
After a transaction has been journalized，the information is then posted to accounts in the general ledger.Each account in the general ledger has three monetary columns：one for debits；one for credits；and one for the account balance.Journal entry data may be posted daily，weekly，or even monthly in a manual accounting system.In computer-based accounting systems，transaction data are typically posted to general ledger accounts simultaneously with the journalizing process.Table 4-5 shows the general ledgers for the above transactions for Mars.
Table 4-5 Mars General Ledgers
（continued）
3.Prepare a Trial Balance
The trial balance is a listing of all the accounts and their balances to ensure that total debits equal total credits.Obviously，if total debits do not equal total credits，an error has occurred，and the accountant has to track down the error and correct it.However，even if a trial balance has equal debits and credits，there may be errors in the accounting records.For example，the debits and credits of a journal entry were posted to incorrect accounts.Table 4-6 is the trial balance for Mars.
Table 4-6 Mars Trial Balance
The accrual accounting requires that the economic impact of a transaction is recorded whether or not the transaction involves cash.Therefore，a special category of journal entries is needed at the end of an accounting period，which is called adjusting entries.
1.Record Adjustments in the General Journal
There are two main types of year-end adjustments：（1）valuation adjustments；（2）accruals and deferrals adjustments.
Valuation adjustments Depreciation is one of the most common items included in this group. Depreciation is the systematic allocation of the cost of an asset over the different periods benefited by the use of the asset.The benefit received from the non-current asset will extend more than one year.Therefore，the cost of the non-current asset ought to be charged to those accounting periods.Assume Mars uses the straight-line method of depreciation.The yearly portion of the depreciation is computed by the straight-line formula：
Depreciation=（Cost-Salvage Value）/Life
The cost is the amount paid for the asset.The salvage value is the estimated amount of proceeds that will be collected upon disposal of the asset.The life is the number of years that the firm expects to utilize the asset.The depreciation expense for the furniture is computed as $ 24 000 divided by 48 months or $ 500 per month.Table 4-7 is the adjusting entries of depreciation expense in general journal for Mars.
Table 4-7
Accruals and deferrals adjustments A deferred item is one for which the cash has been paid or received，but the expense or revenue has not yet been recognized.An accrual item is one for which the cash has not yet been paid or received，but the expense or revenue has already been recognized.
A deferred expense is an asset that represents a prepayment of an expense item.For example，when Mars prepaid its $ 12 000 one-year rent on June 3，the company debited an asset account，prepaid rent，and credited cash.Over the rent period，the economic benefit provided by the asset will be gradually used up.As a result，by the end of the accounting period，the decrease in the asset should be recognized as an expense so that the company's assets are not overstated and expenses are not understated.Table 4-8 is the adjusting entries of a deferred expense in general journal for Mars.
Table 4-8
A deferred revenue is a liability that represents an amount received by a business for a service or a product that will be provided or delivered in the future.Suppose a training company receives $ 1 200 from customers for one-year training program starting on August 1.At August 31 there should be $ 100 on the statement of profit or loss as revenue，and $ 1 100 on the statement of financial position as unearned revenue（liability）.
If the original entry is recorded as：
Cash $ 1 200
Unearned Revenue $ 1 200
Then the adjusting entry is：
Unearned Revenue $ 100
Training Revenue $ 100
An accrued asset is a receivable one resulting from revenue that has been earned but has not yet been received.An account receivable is the most common accrued asset.Another one is interest that has not yet been received on an amount loaned to others.For example，if a company issues a one-year $ 10 000 note on July 1 for 6% interest，then it journalizes the entry as：
Notes Receivable $ 10 000
Cash $ 10 000
At July 31，the firm earns interest because it has provided services to the borrower the use of the money.Interest is computed with the simple interest formula：
Interest = Principal×rate×time
Interest earned equals $ 10 000×6%×1/12 or $ 50.The adjusting entry is：
Interest Receivable $ 50
Interest Revenue $ 50
An accrued liability is a liability for an expense that has been incurred but has not yet been paid.For example，the employees of Mars have earned another ten days' wages $ 600，but not been paid，by the ending of June.Table 4-9 is the adjusting entries of an accrued liability for Mars.
Table 4-9
At the end of each year，Mars will be required to pay a corporate income tax on any earned profits.On June 30，Mars did not know how much would be earned for the year，therefore，it could not determine an exact amount of income tax that would need to be paid.However，a business must estimate its income tax expense each accounting period to match the expenses with the revenues earned.After reviewing the tax rate schedule，Mars recorded a $ 700 accrued liability as an estimate of the corporate income tax that would eventually be paid on the profit earned during June.Table 4-10 is the adjusting entries of income tax expense for Mars.
Table 4-10
2.Post Adjustments to the General Ledger
The adjusting journal entries are posted to the general ledger.Then the balances in some accounts have been added.Posting adjusting entries of Mars to general ledger is shown in Table 4-11.
Table 4-11 Posting Adjusting Entries to General Ledger
3.Prepare an Adjusted Trial Balance
Table 4-12 presents the adjusted trial balance for Mars.
Table 4-12 Mars Adjusted Trial Balance
（continued）
When preparing financial statements，Mars needs to count its inventory at hand.Assume Mars determines that the ending inventory is $ 3 500.With this information and the account balances in the adjusted trial balance，Mars's financial statements are developed.The statement of profit or loss，the statement of changes in equity，and the statement of financial position for Mars are given in Table 4-13.
Table 4-13 Mars Financial Statements
（continued）
The accounts of an entity are divided into two categories：permanent accounts and temporary accounts.Balance sheet accounts are called permanent accounts because their period-ending balances are carried forward to the next accounting period.Alternately，revenue，expense，and dividend accounts are referred to as temporary accounts because they begin each new accounting period with zero balance.These temporary accounts all affect the balance of one permanent account：retained earnings.
Closing entries are designed to transfer the amounts stored in the temporary accounts to retained earnings.An income summary account，also a temporary account，is used to channel the balances of all temporary accounts into the retained earnings account through closing entries.
There are four closing entries that entities make at the end of an accounting period.
（1）Transfer credit balances of income statement accounts to the income summary account.
（2）Transfer debit balances of income statement accounts to the income summary account.
（3）Transfer the balance of income summary account to the retained earnings account.
（4）Transfer the balance of the dividends account to the retained earnings account.
Normally，the closing process only takes place at the end of the entity's fiscal year but for illustrative purposes，it is assumed that Mars closes its books at the end of each month.
Table 4-14 presents the closing entries for Mars at June 30，20×1.
Table 4-14 Mars General Journal：Closing Entries
①销货成本=期初存货+本期购进-期末存货，所以期末存货在分录中与其他费用方向相反。参见本书第2部分第5章有关存货的处理。此外，部分教材把期末存货的处理作为调整事项，本书把期末存货作为结账分录处理。
Then，the closing entries are posted to the general ledgers.After the closing entries are recorded and posted，Mars produces the post-closing trial balance.This is left as an exercise for the reader，and you should obtain total debits and credits equaling $ 66 000.
account 账户
accounting equation 会计等式，会计平衡式
accrual 应计
accrued asset 应计资产
accrued liability 应计负债
accumulated depreciation 累计折旧
adjusted trial balance 调整后的试算平衡表
adjusting entry 调整分录
allowance for doubtful accounts 坏账准备
cash dividend 现金股利
closing entry 结账分录
common stock 普通股
contra account 抵减账户
credit 贷项，信贷
debit 借项，借方
deferral 递延
deferred expense 递延费用
deferred revenue 递延收入
depreciation 折旧
dividend 股利
double-entry bookkeeping system 复式记账系统
entry 分录
income summary account 本年利润账户
journal 日记账
ledger 分类账
par value 面值
permanent account 永久性账户
posting 过账
post-closing trial balance 结账后试算平衡表
sales discount 销售折扣
sales returns and allowances 销售退回与折让
salvage value 残值
temporary account 暂时性账户
trial balance 试算平衡表
T-account T型账户
unearned revenue 预收收入
valuation adjustments 估值调整
本章涉及的账户列表（Charts of accounts）
101 Cash 现金
102 Accounts Receivable 应收账款
105 Inventory 存货
126 Prepaid Rent 预付租金
150 Furniture 家具（固定资产）
151 Accumulated Depreciation 累计折旧
201 Accounts Payable 应付账款
205 Wages Payable 应付工资
208 Income Tax Payable 应付所得税
301 Common Stock 普通股
305 Retained Earnings 留存收益
401 Dividends 股利
501 Sales 销售收入
502 Purchases 采购
505 Wages Expense 工资费用
506 Rent Expense 租金费用
508 Depreciation Expense 折旧费用
510 Utility Expense 公用事业费用
520 Income Tax Expense 所得税费用
550 Income Summary 收入汇总（本年利润）
会计账簿的分类
会计账簿按用途可以分为以下3种。
1.序时账簿
序时账簿又称日记账，是按照经济业务发生或完成时间的先后顺序逐日逐笔进行登记的账簿。在我国，大多数单位一般只设现金日记账和银行存款日记账。
2.分类账簿
分类账簿是对全部经济业务事项按照会计要素的具体类别而设置的分类账户进行登记的账簿。分类账簿按照反映的经济业务详细程度不同而不同。按照总分类账户分类登记经济业务事项的是总分类账簿，简称总账；按照明细分类账户分类登记经济业务事项的是明细分类账簿，简称明细账。
3.备查账簿
备查账簿简称备查簿，是对某些在序时账簿和分类账簿等主要账簿中都不予登记或登记不够详细的经济业务事项进行补充登记时使用的账簿。
我国常用的账务处理程序
我国常用的账务处理程序主要有：记账凭证账务处理程序、汇总记账凭证账务处理程序、科目汇总表账务处理程序等。
1.记账凭证账务处理程序
记账凭证账务处理程序是指对发生的经济业务事项都要根据原始凭证或汇总原始凭证编制记账凭证，然后直接根据记账凭证逐笔登记总分类账的一种账务处理程序。它是基本的账务处理程序，其一般程序是：①根据原始凭证编制汇总原始凭证；②根据原始凭证或汇总原始凭证编制记账凭证；③根据收款凭证、付款凭证逐笔登记现金日记账和银行存款日记账；④根据原始凭证、汇总原始凭证和记账凭证登记各种明细分类账；⑤根据记账凭证逐笔登记总分类账簿；⑥期末，现金日记账、银行存款日记账和明细分类账的余额同有关总分类账的余额核对相符；⑦期末，根据总分类账和明细分类账的记录编制会计报表。
记账凭证账务处理程序简单明了，易于理解，总分类账可以较详细地反映经济业务的发生情况。其缺点是：登记总分类账的工作量较大。该财务处理程序适用于规模较小、经济业务量较少的单位。
2.汇总记账凭证账务处理程序
汇总记账凭证账务处理程序是根据原始凭证或汇总原始凭证编制记账凭证，定期根据记账凭证分类编制汇总收款凭证、汇总付款凭证和汇总转账凭证，再根据汇总记账凭证登记总分类账的一种账务处理程序。其一般程序是：①根据原始凭证编制汇总原始凭证；②根据原始凭证或汇总原始凭证编制记账凭证；③根据收款凭证、付款凭证逐笔登记现金日记账和银行存款日记账；④根据原始凭证、汇总原始凭证和记账凭证登记各种明细分类账；⑤根据各种记账凭证编制有关汇总记账凭证；⑥根据各种汇总记账凭证登记总分类账；⑦期末，现金日记账、银行存款日记账和明细分类账的余额同有关总分类账的余额核对相符；⑧期末，根据总分类账和明细分类账的记录编制会计报表。
汇总记账凭证账务处理程序减轻了登记总分类账的工作量，便于了解账户之间的对应关系。其缺点是：按每一贷方科目编制汇总转账凭证，不利于会计核算的日常分工，当转账凭证较多时，编制汇总转账凭证的工作量较大。该财务处理程序适用于规模较大、经济业务较多的单位。
3.科目汇总表账务处理程序
科目汇总表账务处理程序又称记账凭证汇总表账务处理程序，它是根据记账凭证定期编制科目汇总表，再根据科目汇总表登记总分类账的一种账务处理程序。其一般程序是：①根据原始凭证编制汇总原始凭证；②根据原始凭证或汇总原始凭证编制记账凭证；③根据收款凭证、付款凭证逐笔登记现金日记账和银行存款日记账；④根据原始凭证、汇总原始凭证和记账凭证登记各种明细分类账；⑤根据各种记账凭证编制科目汇总表；⑥根据科目汇总表登记总分类账；⑦期末，现金日记账、银行存款日记账和明细分类账的余额同有关总分类账的余额核对相符；⑧期末，根据总分类账和明细分类账的记录编制会计报表。
科目汇总表账务处理程序减轻了登记总分类账的工作量，并可做到试算平衡，简明易懂，方便易学。其缺点是：科目汇总表不能反映账户对应关系，不便于查对账目。它适用于经济业务较多的单位。
1.Under double-entry bookkeeping，what are the debit and credit relationships of accounts？
2.Give an example of a transaction that results in：
（a）A decrease in an asset and a decrease in a liability.
（b）A decrease in one asset and an increase in another asset.
（c）A decrease in one liability and an increase in another liability.
3.List the debit and credit accounts for each of the following transactions.
（a）Billing a customer for work done.
（b）Receipt of cash from customer on account.
（c）Purchase of office supplies on account.
（d）Purchase of 10 gallons of gasoline for the delivery truck.
4.What are adjusting entries and why are they necessary？
5.Employees are paid every Saturday for the preceding work week. If a statement of financial position is prepared on Thursday，December 31，what does the wages earned during the first four days of the week represent？Explain.
6.Give some common examples of contra accounts. Explain why contra accounts are used.
7.What are closing entries and why are they necessary？
Exercise 1
Lydia Service Shop had the following transactions during the first month of business.
Aug. 2 Invested $ 12 000 cash and $ 2 500 of equipment in the business.
7 Purchased supplies on account for $ 400.（Debit asset account.）
12 Performed services for clients，for which $ 1 300 was collected in cash and $ 670 was billed to the clients.
15 Paid August rent $ 600.
19 Counted supplies and determined that only $ 270 of the supplies purchased on August 7 are still on hand.
Instructions
Journalize the transactions.
Exercise 2
On July 1，20×5，Blair Co. pays $ 18 000 to Bush Insurance Co. for a 3-year insurance contract. Both companies have fiscal years ending on December 31.
Instructions
1.For Blair Co.，journalize the entry on July 1 and the adjusting entry on December 31.
2.Journalize the entry on July 1 and the adjusting entry on December 31 for Bush Insurance Co. Bush uses the accounts“Unearned Insurance Revenue”and“Insurance Revenue”.
Exercise 3
Greens Co. uses the following account titles：Service Revenue，Accounts Receivable，Interest Expense，Interest Payable，Salaries Expense，Salaries Payable，Allowance for Doubtful Accounts，and Bad Debt Expense.
Instructions
Prepare the following adjusting entries on December 31 for Greens.
（a）Interest on notes payable of $ 400 is accrued.
（b）Fees earned but unbilled total $ 1 400.
（c）Salaries earned by employees of $ 700 have not been recorded.
（d）Bad debt expense for year is $ 900.
Exercise 4
Sparkie has year-end account balances of Sales $ 828 900；Interest Revenue $ 13 500；Cost of Goods Sold $ 556 200；Operating Expenses $ 189 000；Income Tax Expense $ 35 100；and Dividends $ 18 900.
Instructions
Prepare the year-end closing entries.
Exercise 5
The journal entries below are subtracted from Mar's book.
1 Cash 400
Accounts Receivable 400
2 Accounts Payable 100
Inventory 100
3 Cash 7 000
Loan Payable 7 000
4 Cash 200
Accounts Receivable 700
Sales 900
Cost of Goods Sold 600
Inventory 600
5 Prepaid Insurance 200
Cash 200
6 Wages payable 130
Wages Expense 75
Cash 205
Instructions
For each of the journal entries above，write a description of the underlying event.