Chapter 2 – The Accounting Cycle

in its simplest Form

Chapter Outline
1. Starting an Accounting System
2. Recording the Operating Entry
3. Posting the Opening Entry
4. Debit and Credit of the Transaction
Affecting Balance Sheet
5. Debit and Credit of Revenue and
Expense Transaction
6. Journalizing, Posting Business
Transactions
 Starting an Accounting System
• A business transactions require the application of
three basic accounting concepts:
 Recording a transaction at the right time

 Placing the right value on it, and

 Calling it by the right name

• The accounting systems are designed to show the

increases and decreases in each accounting
equation element as a separate record. This record
is called an account.
Starting an Accounting System Cont’d …
• An account, in its simplest form, has three
parts.
1.A title, which is the name of the
accounting equation element recorded in
the account.
2.A space for recording increases in the
amount of the item, stated in terms of
money.
3.A space for recording
Title decreases
Right
The accountLeftform
Side is simply
Side named as a T
account for it resembles
Debit (Dr.) the letter T.
Credit
(Cr.)
Starting an Accounting System Cont’d …

• The act of entering an amount on the left

side of an account is called debiting the
account. Where as, making an entry on the
right side is crediting the account.
• There are two systems of accounting for
recording transactions
 Single Entry System and
 Double Entry System.
• The other classification is
 Cash Basis
 Accrual Accounting System
Starting an Accounting System Cont’d …
• Single Entry System - it sounds
economical, but it is, really, costly.
lack of system.
Is adopted where the business is run on
cash basis only.
not a scientific system and final accounts
cannot be easily prepared on the basis of
this system.
Small businesses and organizations that do
not require ascertainment of profit, follow
this system.
Starting an Accounting System Cont’d …

Double Entry System - The only real system is

the double entry system.
 recognizes the fundamental factor that every
transaction is double-sided affair.
 for every debit, there is a corresponding
credit.
 is universally followed in accounting.
 Accuracy of accounting can be maintained
and arithmetical correctness can easily be
established.
 Financial statements i.e. Profit and Loss
Account and Balance Sheet are easily
prepared, once the concern follows the
Starting an Accounting System Cont’d …
• Cash Basis of accounting - recognizes the
impact of events/transactions when cash is
paid or received.
• Accrual Basis of accounting - recognizes the
impact of events/transactions as they occur.
 Transactions are recorded even when cash
is not received or paid.
Starting an Accounting System Cont’d …
Chart of account
• A group of accounts for a business entity is called
a ledger. A list of the accounts in the ledger is
called a chart of accounts.
• The accounts are normally listed in the order in
which they appear in the financial statements.
• The balance sheet accounts are listed first, in the
order of
 assets,
 liabilities, and
 owner’s equity.
• The income statement accounts are then listed in
the order of
 revenues and
• Assets - are resources owned by the business entity.
These resources can be physical items, such as cash and
supplies, or intangibles that have value (patent rights,
copy rights, and trademarks). Other assets include
accounts receivable, prepaid expenses (such as
insurance), buildings, equipment, and land.

• Liabilities - are debts owed to outsiders (creditors).

Liabilities are often identified on the balance sheet by
titles that include the word payable. Examples of
liabilities include accounts payable, notes payable, and
wages payable.
 Cash received before services are delivered creates a
liability to perform the services. These future service
commitments are called unearned revenues.
Starting an Accounting System Cont’d …

• Owner’s equity is the owner’s right to

the assets of the business after all
liabilities have been paid. For a
proprietorship, the owner’s equity is
represented by the balance of the owner’s
capital account. A drawing account
represents the amount of withdrawals
made by the owner.
Chart of Accounts for NetSolutions
In Sum, the accounting equation and the
increase and decrease of an accounts there
of can be shown as follows
 Recording the Operating Entry
• Like every event/transaction the opening
entry of a transaction is recorded.
• The trial balance of the year is journalized
and recorded in each ledger as the
beginning balance for the next year.
• Transferring journal entries to the ledger
accounts is called posting.
 Posting the Operating Entry
• The recorded balance of each journal is posted to the
ledger as an opening entry.
• Posting involves the following steps.
1. In the ledger, in the appropriate columns of the
account(s) debited, enter the date, journal page, and
debit amount shown in the journal.
2. In the reference column of the journal, write the
account number to which the debit amount was posted.
3. In the ledger, in the appropriate columns of the
account(s) credited, enter the date, journal page, and
credit amount shown in the journal.
4. In the reference column of the journal, write the
account number to which the credit amount was
posted.
Posting the Operating Entry Cont’d
• The post Closing Trial Balance for NetSolutions are
shown as follows will be journalized and then posted to
the ledgers.

Cash ………………………………… 6,873

Account Receivable …………..….. 2,225
Supplies …………………………... 980
Land ……………………………. 10,000
Account Payable ……………………………………… 2,355
Cecil Jameson Capital ……………………………….
17,220
Journalizing the Opening Balance
Posting Opening Balance