Chapter 3
Beginning the Accounting Cycle
Chapter Overview
The chapter begins by explaining the accounting cycle is the accounting procedures performed over a
period of time and the accounting cycle takes place over a period of time called a fiscal year. The
accounting cycle has several steps: the transaction occurs, is analyzed, recorded as a journal entry in the
general journal, and posted to the general ledger. The information in the general ledger is used to prepare
the trial balance. While the trial balance is not a formal financial statement, it is used to prepare formal
financial statements: the income statement, the statement of owner’s equity, and the balance sheet.
Transaction analysis is used to understand how to record a business transaction as a journal entry.
Learning Objectives
After studying Chapter 3, your students should gain proficiency in the following:
2. Posting to the Ledger.
3. Preparing the Trial Balance.
Chapter 3 Assignment Grid
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Discussion Questions and Critical Thinking/Ethical Case
1 Accounting Cycle 1 5 Easy
2 Accounting Period 1 5 Easy
10 Posting and Balancing 2 5 Easy
11 Posting and Balancing 2 5 Medium
12 Posting and Balancing 2 5 Medium
13 Accounting Errors 3 5 Medium
14 Ethical Issue 3 5 Medium
Concept Checks
1 General Journal 1 5 Easy
Exercises (Set A)
3A-1 Journal Entries 1 10 Easy
3A-2 Journal Entries 1 10 Easy
Exercises (Set B)
3B-1 Journal Entries 1 10 Easy
Problems (Set A)
3A-1 Journalizing 1 30 Medium
Problems (Set B)
3B-1 Journalizing 1 30 Medium
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Financial Report Problem
Reading Amazon’s Annual Report 3 5 Easy
Keeping It Real
Chapter 3
Beginning the Accounting Cycle
Summary: The accounting cycle consists of normal accounting procedures that take place over a period
of time. The cycle begins with the recording of business transactions into a journal and ends with the
completion of a post-closing trial balance. The accounting period is the span of time in which the
accounting cycle takes place. Although the accounting period may vary, usually, it is one year long.
Learning Unit 3-1: Analyzing and Recording Business Transactions
into a Journal (Steps 1 and 2 of the Accounting Cycle)
Summary: The General Journal is the simplest journal and records transaction information in
chronological order according to the transaction date. This journal records the journal entry in its entirety.
Key Concepts: Accounting cycle, accounting period, calendar year, interim reports, journal, journal
entry, journalizing, book of original entry, book of final entry, compound journal entry
Lecture Outline:
1. General journal or Journal:
a. is the simplest form of a journal
2. Journal entry:
a. The format that transactions (debits and credits) are recorded once it is analyzed.
b. Journal entries rules:
i. The debit portion of the transaction is always recorded first.
3. Journalizing:
4. Compound journal entry:
a. A journal entry that affects more than two accounts on the debit or the credit side.
5. These are examples of the most common types of business transactions:
a. The owner investing cash (asset) in the business. (Fig. 3.2 on page 68)
b. The purchase of equipment with a down payment (cash) and the rest on credit. (Fig.3.3
on page 68) This is an example of a compound entry: a journal entry that affects more
than two accounts on the debit or the credit side.
Dr. Computer Equipment XX
c. Prepayment of rent with cash (Fig. 3.4 on page 69).
Dr. Prepaid Rent (asset) XX
Rent paid in advance
d. Purchasing of computer supplies on account (Fig. 3.5 on page 69).
Dr. Computer Supplies (asset) XX
Cr. Accounts Payable XX
Purchase computer supplies on account
e. Recording of fees earned (revenue) and (cash) received (Fig. 3.6 on page 69).
f. Recording of salaries paid (Fig. 3.7 on page 70).
Dr. Office Salaries Expense XX
Cr. Cash XX
Payment of office salaries
g. Receive advertising bill (but unpaid) (Fig. 3.8 on page 70)
h. Withdrawal of funds (cash) for personal use (Fig. 3.9 on page 70)
Dr. Withdrawals XX
Cr. Cash XX
page 71)
Dr. Accounts Receivable XX
Cr. Graphic Design Fees (revenue) XX
Bill customer for fees earned
j. Payment of office salaries (Fig. 3.11 on page 71)
Dr. Office Salaries Expense XX
Cr. Cash XX
Payment of office salaries
k. Partial payment (cash) of an amount owed (accounts payable). (Fig 3.12 on page 71)
Teaching Tips/Strategy: As classwork, your students should complete the Learning Unit 3-1 Try It! and
discuss the Demonstration Summary Problem (page 83) to review the basic concepts. Indicate and
distinguish keyword included on each transaction to facilitate the recording process.
Example of transactions keywords are:
Paid – indicate a check or a payment done = cash is decreased (credit)
The Exercises 3A-1 and 3A-2 are excellent to teach how to analyze transactions and complete journal
entries. Problem 3A-1 is a comprehensive problem to assess the full understanding of the learning
objective concept. Review the “Success Coach LU 3-1” (page 87
) and the “Ten-Minute Quiz” questions #3-#10 to reinforce the Learning Objective 3-1 concepts.
Learning Unit 3-2: Posting to the Ledger (Step 3 of the Accounting
Cycle)
Summary: The transactions from the general journal are entered (or posted) to the general ledger which
updated from the journal.
Key Concepts: Posting, four-column account, cross-referencing
Lecture Outline:
1. The General Ledger:
a. lists the balances and changes to each account within the business,
b. records all of the transactions in one location,
2. Posting: transferring the information from the general journal to the general ledger.
Steps for posting to the ledger:
a. Record the date.
b. Record the journal page number in the posting reference (PR) column of ledger.
3. Posting References:
a. Journal PR column illustrates which transactions have and have not been recorded.
Teaching Tips/Strategy: Review the Demonstration Summary Problem for an example of posting to
ledger accounts.
Use the “Success Coach LU 3-2 (page 87) to check understanding of the objective concepts. Assign
Exercise 3A-3 or 3B-3 to provide an opportunity to practice posting journal entries to the ledger.
Learning Unit 3-3: Preparing the Trial Balance (Step 4 of the
Accounting Cycle)
Summary: A Trial Balance is an informal listing of the ledger accounts and their balances in the ledger
that aids in proving the equality of debits and credits. It is prepared by listing all accounts and recording
accuracy. Both credit and debit columns must balance and match.
Key Concepts: Trial balance, slide, transposition
Lecture Outline:
3.17)
3. A trial balance is not a formal financial statement and will NOT show the beginning capital
balance if additional investments were made during the year.
5. Errors in posting need to have an audit trail and be initialed by the person changing or correcting
them.
6. Understand common mistakes made when preparing a trial balance:
a. Mathematical errors often result in amounts being off by 10, 100, 1,000, etc.
b. A posting could have been missed if the difference between total debits and credits is
equal to an individual account balance in the ledger.
7. Correcting mistakes when journalizing and posting:
a. If the mistake was made before the posting, draw a line through the wrong information in
the journal, write the correct information above it and initial the change.
Teaching Tips/Strategy: Indicate that a trial balance is not a financial statement but is used as a tool to
verify the accuracy of the account ending balances before financial statements are completed.
Use the “Success Coach LU 3-3 (page 87) to check understanding of the objectives concepts. Concept
Name Date Section
CHAPTER 3
TEN-MINUTE QUIZ
Circle the letter of the best response.
1. Which of the following illustrates the accounting cycle?
1-The Trial Balance is prepared. 2-Postings are made into the General Ledger
3-Journal entries are recorded 4-Transactions occur
a. 1, 2, 3, 4 b. 1, 3, 2, 4
c. 4, 3, 2, 1 d. 4, 2, 3, 1
2. Which is not a General Journal?
a. Book of original entry b. Book of final entry
c. Journal d. Simplest form of journal
3. Select the transaction that would increase assets.
a. Purchase inventory for cash
b. Provided consulting services for cash
c. Received cash from a bill sent to customers last month
d. Paid insurance for the next 3 months
4. Select the transaction that increases owner’s equity.
a. Received cash from a bill sent to customers last month
b. Paid insurance for the next 3 months
c. Purchase inventory for cash
d. Provided consulting services for cash
5. Select the transaction that increases liabilities.
a. Paid insurance for the next 3 months
b. Purchase inventory for cash
c. Received utility bill
d. Received cash from a bill sent to customers last month
6. The proper journal entry to record the $100 purchase of supplies on account would be:
a. Office Supplies 100
Accounts payable 100
b. Cash 100
Office Supplies 100
c. Office Supplies 100
Cash 100
d. Accounts payable 100
Office Supplies 100
7. The proper journal entry to record the $200 rent paid in advance would be:
a. Prepaid Rent 200
Accounts payable 200
b. Cash 200
Prepaid Rent 200
c. Prepaid Rent 200
Cash 200
d. Accounts payable 200
Prepaid Rent 200
8. The proper journal entry to record receiving the $150 advertising bill would be:
a. Cash 150
Advertising Expense 150
b. Advertising Expense 150
Accounts payable 150
c. Advertising Expense 150
Cash 150
d. Accounts payable 150
Advertising Expense 150
9. The proper journal entry to record the $150 payment of last month’s advertising bill would be:
a. Cash 150
Advertising Expense 150
b. Advertising Expense 150
Accounts payable 150
c. Advertising Expense 150
Cash 150
d. Accounts payable 150
Cash 150
10. The proper journal entry to record the $170 receipt of a bill sent to a customer last month would
be:
a. Cash 170
Accounts Receivable 170
b. Fees Earned 170
Accounts Receivable 170
c. Fees Earned 170
Cash 170
d. Accounts Receivable 170
Cash 170
Answer Key to Chapter 3 Quiz