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The Accounting Cycle And its Steps

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 1

The Accounting Cycle

And its Steps.
 2

The Accounting Cycle & its Steps.

Dr. Bhupendra Kumar
DTU Ethiopia
 3
Double-Entry Accounting

A system of recording transactions in a way that

maintains the equality of the accounting
equation.
Assets = Liabilities + Owners’ Equity
or

A = L + OE
 4

Double-Entry Accounting Facts

 For every transaction, there must be

at least one debit and one credit.
 Debits must always equal credits for
each transaction.
 Debits are always entered on the left
side of an account and credits are
always entered on the right side.
 The Accounting Equation 5

with T-Accounts

Assets = Liabilities + Owners’ Equity

DR CR DR CR DR CR
+ - - + - +
 6

Journalizing
 Identify the accounts involved with an
event or transaction.
 Determine whether each account
increased or decreased.
 Determine the amount by which each
account was affected.
This process is used whether the
accounting is being done manually or
with a computer.
 7
Summary of the Accounting Cycle
 Analyze transactions and business documents.
 Journalize transactions.
 Post journal entries to accounts.
 Determine account balances and prepare a trial
balance.
 Journalize and post adjusting entries.
 Prepare financial statements.
 Journalize and post closing entries.
 Balance the accounts and prepare a post-
closing trial balance.
1. Analyze Transactions and 8

Business Documents
 Transactions are the
exchange of goods or
services between entities,
as well as other events that
have an economic impact
on a business.
 Business Documents are
records that are evidence
of transactions.
 9

2. Journalize Transactions

 A journal is an accounting record in which

business transactions are entered in
chronological order.
 Journal entries record transaction
information; debits equal credits.
 10

Journal Entries
 A journal is an accounting record in which
business transactions are entered in
chronological order.
 Journal entries record transaction
information; debits equal credits.

General Journal Entry Format

Date Debit Entry.................................. xx
Credit Entry............................. xx
Explanation.
 11

Journal Page 1
Post
Date Description Ref. Debits Credits
Jan 1 Cash 5
Revenue 5
Received cash for
services provided.

4 Supplies 12
Accounts Payable 12
Purchased supplies
on account.

10 Accounts Payable 12
Cash 12
Paid for supplies.
 12

Example: Journal Entry

Merchandise is sold to a customer on
account for $75. The cost of the product to
the firm is $60. Make the journal entry.
 13

Example: Journal Entry

Merchandise is sold to a customer on
Merchandise is sold
account for $75. Thetocost
a customer on is
of the product
account
$60. for $75.theThe
Make cost entry.
journal of the product to
the firm is $60. Make the journal entry.
Jan. 1 Accounts Receivable..................... 75
Sales Revenue.......................... 75
Sold merchandise on account.
1 Cost of Goods Sold...................... 60
Inventory................................. 60
To record cost and reduce
inventory.
 14

3. Post Journal Entries to Accounts

 Posting is the process of transferring

amounts from the journal to the general
ledger.
 A ledger is a book of accounts in which
data from transactions recorded in the
journals are posted, classified, and
summarized.
 A chart of accounts lists all accounts used
by the company.
 15
The Reporting Phase

 A trial balance is prepared.

 Adjusting entries are recorded.
 Financial statements are prepared.
 Closing entries are made.
 Post-closing trial balance may be
taken.
4. Determine Account Balances 16

and Prepare a Trial Balance

 Determine the account balance for each
T-Account.
 A Trial Balance is a listing of all account
balances. It provides a means to assure
that debits equal credits.
 XYZ Company 17
Trial Balance
December 31, 2002

Debits Credits
Cash $ 21
Accounts Receivable 15
Inventory 12
Land 200
Accounts Payable $ 30
Capital Stock 150
Retained Earnings 24
Sales Revenue 919
Cost of Goods Sold 850
Advertising Expense 10
Misc. Expenses 15 ______
Total $ 1,123 $ 1,123
 18
5. Adjusting Entries

Adjusting entries are required at the end of

each accounting period for accrual-basis
accounting, prior to preparing the financial
statements. The purpose for adjusting
entries are to:
 Bring balance sheet accounts current.
 Reflect proper amounts of revenues
and expenses on the income statement.
 19
Tips Regarding Adjusting Entries
 Analytical Process. You must determine
what original entry was made (if any) and
what the ending balances should be before
you know what adjusting entry to make.
You cannot memorize adjusting entries.
 Adjusting entries always incorporate a
balance sheet account and an income
statement account.
 Adjusting entries never involve a cash
account.
 20
Most Common Adjusting Entries
• Unrecorded Revenues--Revenues that have been
earned but not yet recorded.
• Unearned Revenues--Revenues that have been
recorded but not yet earned.
• Unrecorded Expenses--Expenses that have been
incurred but not yet recorded.
• Prepaid Expenses--Expenses that have been
recorded but not yet incurred.
 Three-Step Process for 21

Adjusting Entries
 Identify the original entries that were made,
if any. (Original entries are only made for
unearned revenues and prepaid expenses.)
 Determine what the correct balances
should be at this point in time.
 Make the adjustments needed to correct the
balances.
 22
Example: Depreciation
Rosi, Inc., purchased buildings in 1997 at a
cost of $156,000. Each year, 5% of the cost
is depreciated. At the end of 2002, the
following adjusting entry is made:
Adjusting Entry
12/31 Depreciation Expense--Buildings 7,800
Accumulated Depr.--Buildings 7,800
To record depreciation on
building at 5% per year.
 23
Example: Accrued Expenses
At the end of the fiscal period, Rosi, Inc.,
had accrued salaries and wages totaling
$2,150.

Adjusting Entry
12/31 Salaries and Wages Expense 2,150
Salaries Payable 2,150
To record accrued salaries and
wages.
 24
Example: Accrued Revenues
Rosi, Inc., holds a note receivable from a
customer on which interest totaling $250 has
accrued.

Adjusting Entry
12/31 Interest Receivable 250
Interest Revenue 250
To record accrued interest on a
note receivable.
 25
Example: Prepaid Expenses
Rosi, Inc.’s trial balance shows that the asset
account Prepaid Insurance has a balance of
$8,000. By December 31, only $3,800
applies to future periods.
Adjusting Entry
12/31 Insurance Expense 4,200
Prepaid Insurance 4,200
To record expired insurance.
$8,000 - $3,800
 26
Example: Deferred Revenues
Rosi, Inc., receives a payment of $2,550
from a customer prior to the services being
rendered. By December 31, $2,075 in
services have been provided.

Original credit to a liability account.

Adjusting Entry
12/31 Unearned Rent Revenue 2,075
Rent Revenue 2,075
To record rent revenue
($2,550 - $475).
 27

6. Preparing Financial Statements

• After all transactions have been recorded, a

trial balance prepared, and adjusting entries
made, the financial statements are prepared.
Record Prepare Make Prepare
Trans- Trial Adjusting Financial
actions Balance Entries Statements
 28
7. The Closing Process
 Real accounts are permanent accounts not
closed to a zero balance at the end of the
accounting period. These accounts are
carried forward to the next period.
 Nominal accounts are temporary accounts
that are closed to a zero balance at the end of
each accounting period.
 Closing entries reduce all nominal accounts
to a zero balance.
 29

The Closing Process

Revenues Retained Earnings
Beg. Bal. xxx
xxx Bal. xxx
Revenues

Since the revenue account is

a nominal account, it is
closed at the end of the
period to Retained Earnings.
 30

The Closing Process

Retained Earnings
Beg. Bal. xxx

Expenses Revenues

Expenses
The expense account is
Bal. xxx xxx credited in order to close
the account at the end of
the period.
 31

The Closing Process

Retained Earnings
Beg. Bal. xxx
The dividends
account, which is Expenses Revenues
also nominal, is Dividends
credited to close
out the balance.

Dividends

Bal. xxx xxx

 32

The Closing Process

Retained Earnings
Beg. Bal. xxx
Retained Earnings
is a real account Expenses Revenues
and always carries Dividends
a balance.
End. Bal. xxx

Net Income for the

period is determined
by these two entries.
 33
8. Post-Closing Trial Balance
• Provides a listing of all real account
balances at the end of the closing
balance.
• The trial balance assures that total
debits equal total credits prior to the
beginning of the new accounting
period.
• Only real accounts will have a balance
at this time.
 34
Example: Post-Closing Trial Balance
Jim Brewster, Inc.
Post-Closing Trial Balance
December 31, 2002
Debits Credits
Cash $ 8,200
Accounts Receivable 4,000
Inventory 3,000
Supplies 1,000
Accounts Payable $ 5,000
Capital Stock 10,000
Retained Earnings 1,200
Totals $16,200 $16,200
 35
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