Steps in the accounting process (complete):

1. Organize the data to be reported by using a chart of accounts and a general ledger.

2. Analyze business events, or transactions, and convert them into debits and credits through the preparation of journal entries.

3. Post the journal entries to the general ledger.

4. Prepare an unadjusted trial balance to verify that the total dollar amount of debits equals the total dollar amount of credits in the general ledger. If debits equal credits, the accounting equation will balance.

5. Review the data in the unadjusted trial balance for reasonableness and prepare necessary adjusting journal entries to correct any unreasonable account balances.

6. Post the adjusting journal entries to the general ledger.

7. Prepare an adjusted trial balance to verify that the total dollar amount of debits equals the total dollar amount of credits in the general ledger. If debits equal credits, the accounting equation will balance. If the accounting equation balances, the financial statements will tie together.

8. Prepare financial statements: income statement, statement of retained earnings, and balance sheet.

9. Prepare closing journal entries.

10. Post the closing journal entries to the general ledger.

11. Prepare a post-closing trial balance to verify that the total dollar amount of debits equals the total dollar amount of credits in the general ledger. If debits equal credits, the accounting equation will balance. If the accounting equation balances, the financial statements will tie together.

As a result of the above 11 steps, the financial statements tie together, the dollar amounts reported on the financial statements are reasonable, and the results of management activities in different time periods are kept separate from one another. Management and others can use the information in the financial statements to help make decisions.
 

** You now have the background to do text problems 5.1 and 5.2.
 

Practice Exercise

The Boeing Company's December 31, 2005 adjusted trial balance reported retained earnings of $17,229 million. For the year ended December 31, 2006 the company reported net income of $2,215 million and dividends of $991 million.

1. Prepare the Boeing Company's statement of retained earnings for the year ended December 31, 2006.

Boeing Company 
Statement of Retained Earnings 
For the Year Ended December 31, 2006

 

Balance, December 31, 2005

$17,229

Plus: Net Income for 2006

$2,215

Subtotal

$19,444

Less: Dividends in 2006

$991

Balance, December 31, 2006

$18,453

 

2. Determine the net dollar amount of the Boeing Company's resources that had been generated by management during 2006.

Net income is the dollar amount of resources generated by management during a specific period of time. During 2006, Boeing's net income was $2,215 million. Thus, Boeing's management generated $2,215 million of resources for the company during 2006.

3. Determine the dollar amount of the Boeing Company's resources that were generated by management and distributed to owners during 2006.

Dividends are the dollar amount of management-generated resources distributed to owners. Boeing's dividends were $991 million during 2006.

4. Determine the dollar amount of the Boeing Company's December 31, 2006 resources that had been generated by management since the company was founded and kept in the company.

Retained earnings is the dollar amount of management-generated resources kept or retained in a company. Boeing's retained earnings were $18,453 million on December 31, 2006.

 

 

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