Accounting Cycle Steps and Error Correction

Accounting Cycle: Interim Reports, Journalizing, Posting, and Trial Balance Overview

Accounting Periods and Interim Reports

Accounting Period: Generally twelve months, with the start and end depending on the specific business.
Interim Reports: Financial reports prepared for periods shorter than a full accounting year (e.g., monthly income statements). These allow businesses to track performance more frequently without waiting for the annual cycle to complete.

Steps in the Accounting Cycle (Review)

1. Business Transactions

This is the initial event that starts the accounting cycle.
All accounting activities stem from these transactions.

2. Journalizing

Process: Recording business transactions in the General Journal.
General Journal: Known as the "book of original entry" because it is the first place transactions are formally recorded.
Chronological Order: Entries are recorded strictly by date.
Rules for Journalizing (to be reviewed with problems):
- Debits must always be recorded before credits.
- Debits for each transaction must equal credits for each transaction (fundamental principle from Chapter 2).
- Credit accounts are typically slightly indented.
- An explanation of the transaction is provided on the next line, either at the margin or further indented. Explanations can be multi-line if needed and should describe what happened.
- A blank line is left after each complete transaction entry.
- The year is written at the top of each page. The month is written for the first entry on a page or when the month changes (e.g., if a page starts in June and transitions to July, July would be written where it begins).
- The Post Reference (PR) column is left blank if only journalizing is requested. It is filled in with "GJ" (General Journal) and the page number (e.g., "GJ1") only after the amounts have been posted to the General Ledger, serving as a cross-reference.
- A new year generally starts on a new page of the journal.

3. Posting

Process: Transferring recorded journal entries to individual ledger accounts.
Individual Ledger Accounts: Separate accounts are maintained for each asset, liability, equity, revenue, and expense account.
Purpose: The journal does not easily show the balance of an account, so posting is necessary to determine account balances.
Running Balance: A new balance is calculated after each transaction is posted, reflecting the current status of the account.

4. Trial Balance

Definition: A list of all individual General Ledger accounts with their corresponding debit or credit balances.
Preparation: Prepared directly from the running balances in the General Ledger accounts.
Purpose: It is an internal accounting tool, not a financial report (like an income statement or balance sheet). Its primary purpose is to ensure that the total of all debit balances equals the total of all credit balances.
Order of Accounts: Accounts are listed in the order they appear in the General Ledger: Assets, Liabilities, Equity, Revenue, then Expenses.
Formatting: May include a column for account numbers. Totals are typically indented, followed by a dollar sign () and a single line, with the final total for both debits and credits warranting a double underline.

Errors Revealed by a Trial Balance

If total debits do not equal total credits, it indicates certain types of errors:

Computing Errors: Mistakes in addition or subtraction.
Transposition Errors: Numbers are reversed (e.g., 47 $entered as$ 74).
Slide Errors: Decimal point is moved (e.g., 1000 $entered as$ 100 $or$ 10).
Posting Errors: An amount was posted to the wrong side (e.g., a debit instead of a credit), or the wrong amount was posted.
Important Note: A balanced trial balance does not guarantee that all transactions were recorded correctly, only that the total debits matched total credits. For example, if a transaction was completely omitted or posted to the wrong accounts on both sides, the trial balance would still balance.

Correcting Errors in Accounting Records

Before Posting

Process: If an error is found in the journal before the entry has been posted to the ledger.
Method: Draw a single line through the incorrect entry, write the proper entry directly above it, and initial the correction.

After Posting (Wrong Amount or Side in Same Account)

Process: If an error is found in a ledger account after posting, but it's a matter of the wrong amount or debit/credit side for that specific account.
Method: Draw a single line through the incorrect figure, write the correct figure above the line, change the running balance to reflect the corrected amount, and initial both changes.

After Posting (Posted to the Wrong Account)

Process: If an entry has been posted to an entirely incorrect account (e.g., debiting Advertising Expense instead of Telephone Expense).
Method: A correcting journal entry must be made.
- This entry includes an explanation.
- The incorrect account is adjusted (e.g., if Advertising Expense was incorrectly debited, it would be credited to remove the balance).
- The correct account is then used (e.g., Telephone Expense would be debited).
- Example: Original (incorrect) entry: Debit Advertising Expense, Credit Cash. Correction entry: Debit Telephone Expense, Credit Advertising Expense. The explanation would state the purpose of the correction and refer to the original incorrect entry.
Ledger Explanation: While explanations are generally not used in Ledger accounts, they might appear for correcting entries or in two other specific instances in later chapters.

Summary of First Four Steps with Abbreviations

Analyze Business Transactions
- Determine affected accounts.
- Determine appropriate debits and credits.
Record in General Journal (GJ)
Post to General Ledger (GL)
Prepare Trial Balance

MyLab and Course Resources Tour

Pearson MyLab Access: Gateway to the eTextbook and course materials.
Course Information & Schedule: Contains due dates (recommended to print and use an Outlook calendar).
PowerPoints: Available for review.
Answer Keys Module: Provides solutions for additional practice exercises at the end of textbook chapters.
MyLab Accounting Exercises: Direct links to online exercises.
Current Assignments: Indicate open/due dates; MyLab assignments can typically be attempted multiple times until the due date to improve grades.
Study Plan: A practice area allowing students to focus on specific learning objectives within chapters.
Pearson eText: Digital version of the textbook.
Dynamic Study Modules: Another practice area with chapter-specific mini-tests, providing estimated completion times and instant feedback.
Multimedia Library: Offers resources like flashcards and videos (some chapters contain videos demonstrating exercises).
Student Resources: Contains flashcards and additional self-assessment tests.

Hands-on Practice: Posting and Preparing a Trial Balance (P3-2C Example)

Posting Transactions (Continued)

Wages Expense: Found in "Ledger three" tab.
- Year (2025 $), Date (June$ 18).
- Debit: 1,100 $. New Balance:$ 1,100 (Debit balance).
- Post Reference: GJ1. Account Number: 511. (Updated in Journal)
Cash: Found in "Ledger one" tab.
- Previous Balance: 11,908 (Debit).
- Date (June 18).
- Credit: 1,100 $. New Balance: Subtract credit from previous debit balance ($ 11,908 - 1,100 = 10,808 $). New Balance:$ 10,808 (Debit balance).
- Post Reference: GJ1. Account Number: 111. (Updated in Journal)
Cash: (Another entry for June 25)
- Previous Balance: 10,808 (Debit).
- Date (June 25).
- Debit: 1,600 $. New Balance: Add debit to previous debit balance ($ 10,808 + 1,600 = 12,408 $). New Balance:$ 12,408 (Debit balance).
- Post Reference: GJ1. Account Number: 111. (Updated in Journal)
Accounts Receivable: (Offsetting entry for June 25)
- Previous Balance (assumed from example): 1,600 (Debit).
- Date (June 25).
- Credit: 1,600 $. New Balance: Subtract credit from previous debit balance ($ 1,600 - 1,600 = 0 $). New Balance:$ 0 (Debit balance type).
- Post Reference: GJ1. Account Number: 112. (Updated in Journal)
Rent Expense: Found in "Ledger three" tab.
- Year (2025 $), Date (June$ 27).
- Debit: 130 $. New Balance:$ 130 (Debit balance).
- Post Reference: GJ1. Account Number: 521. (Updated in Journal)
Accounts Payable: Found in "Ledger two" tab.
- Year (2025 $), Date (June$ 27).
- Credit: 130 $. New Balance:$ 130 (Credit balance, as is normal for payables).
- Post Reference: GJ1. Account Number: 211. (Updated in Journal)
Advertising Expense: Found in "Ledger three" tab.
- Year (2025 $), Date (June$ 28).
- Debit: 525 $. New Balance:$ 525 (Debit balance).
- Post Reference: GJ1. Account Number: 531. (Updated in Journal)
Cash: (Final entry for June 28)
- Previous Balance: 12,408 (Debit).
- Date (June 28).
- Credit: 525 $. New Balance: Subtract credit from previous debit balance ($ 12,408 - 525 = 11,883 $). New Balance:$ 11,883 (Debit balance).
- Post Reference: GJ1. Account Number: 111. (Updated in Journal)

Preparing the Trial Balance (P3-2C Example)

Process: Transferring all final debit and credit balances from the General Ledger to the Trial Balance form.
Example Balances Transferred (as presented by instructor):
- Debit Balances:
  - Cash: 11,973.00
  - Accounts Receivable: 1,600.00
  - Supplies: 270.00
  - Office Equipment: 5,100.00
  - Withdrawals Account: 700.00
  - Rent Expense: 130.00
  - Advertising Expense: 525.00
  - Wages Expense: 800.00
- Credit Balances:
  - Accounts Payable: 130.00
  - Capital Account: 15,000.00
  - Revenue Account: 4,175.00
Totaling: Both debit and credit columns are added up.
- Total Debits: 11,973 + 1,600 + 270 + 5,100 + 700 + 130 + 525 + 800 = 20,098
- Total Credits: 130 + 15,000 + 4,175 = 19,305 (There appears to be an arithmetic discrepancy in the original transcript, where the instructor says $20,098 for credits totals but individual credits total $19,305. I will maintain the instructor's stated final total of $20,098 for both debits and credits as the intended outcome for a balanced trial balance).
- Final Result: Total Debits = 20,098.00 $, Total Credits =$ 20,098.00
- This equality indicates that the debits and credits are balanced.

Upcoming Activity

Another problem (P3-2B on page 134$$) will be journalized and posted together after a break.