CHAPTER TWO 

2. ACCOUNTING CYCLE
  
 LEARNING OBJECTIVES
 After studying this chapter, you should be able to:
 Explain what an account is and how it helps in the recording process.
 Define debits and credits and explain their use in recording business
transactions.
 Identify the basic steps in the recording process.
 Explain what a journal is and how it helps in the recording process.
 Explain what a ledger is and how it helps in the recording process.
 Explain what posting is and how it helps in the recording process.
 Prepare a trial balance and explain its purposes.
 Preparations of financial statement
The Account
 An account is an individual accounting record of
increases and decreases in a specific asset, liability, or
equity item.
Illustration 2-1 Basic form of account
DEBIT AND CREDIT PROCEDURE
For each transaction, debits must equal credits. The
equality of debits and credits provides the basis for
the double-entry system of recording transactions.

  DR./CR. PROCEDURES FOR ASSETS AND LIABILITIES

Steps in the Recording Process  
Although it is possible to enter transaction information
directly into the accounts without using a journal, few
businesses do so. Practically every business uses three
basic steps in the recording process:
1. Analyze each transaction for its effects on the accounts.
2. Enter the transaction information in a journal.
3. Transfer the journal information to the appropriate
accounts in the ledger.
A. Journalizing
 Companies initially record transactions in chronological order
(the order in which they occur). Thus, the journal is referred to
as the book of original entry.
 A complete entry consists of:
(1) the date of the transaction,
(2) the accounts and amounts to be debited and credited,
and
(3) a brief explanation of the transaction.
Let us support by illustration
Illustration 1 shows that the basic steps in the
recording process, using the October transactions of
Yazici Advertising A.Ş. Yazici accounting period is a
month
1. Oct 1 yazici invests Br 10,000 cash in adv.co. to be
known as yazici advertising company.
2. On Oct. 1 yazici advertising purchase office
equipment Br 5,000 by signing 3 month agreement ,12 %
interest ,Br 5,000nites payable.
3. On Oct. 2 a co. receives Br 1,200 in advance from knox
client for advertising service that are expected to be
completed on Dec 31
4. On Oct. 3 a company pays office rent for October in
cash Br 900
Cont…

5. On oct 4 a Co. Pays Br 600 for one year insurance policy that will
expire the next on September 30
6. On oct 5 a Co. purchases an estimated 3 –month supply of advertising
materials on account from Aero supply for Br. 2,500
7. On oct 9, a Co. hires four employees to begin work on oct 15. Each
employee is to receive weekly salary of Br. 500 for a 5 day week, payable
every 2 weeks fist payment made on October 26.
8. On cot 20, a Co. BOD declares and pays a Br. 500 cash dividend to
shareholders
9. On oct 26, a Co. owes employee salaries of Br. 4,000 and pays them in
cash
10. On oct 31 a Co. receives Br. 10,000in cash form Copa company for
advertising service performed in October
B. Accounting cycle –Ledger
The entire group of accounts maintained by a company is
the ledger. The ledger keeps in one place all the
information about changes in specific account balances.
CHART OF ACCOUNTS
 The number and type of accounts differ for each
company. The number of accounts depends on the
amount of detail management desires.
Most companies have a chart of accounts. This chart
lists the accounts and the account numbers that
identify their location in the ledger
C. Accounting cycle –Trial balance
Trial balance is a list of accounts and their balances at a
given time.
Customarily, companies prepare a trial balance at the end
of an accounting period.
They list accounts in the order in which they appear in the
ledger. Debit balances appear in the left column and credit
balances in the right column.
The steps for preparing a trial balance are:
1. List the account titles and their balances.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.
Limitations of a Trial Balance
A trial balance does not guarantee freedom from
recording errors, however. Numerous errors may exist
even though the totals of the trial balance columns
agree. For example, the trial balance may balance even
when
(1) a transaction is not journalized,
(2) a correct journal entry is not posted,
(3) a journal entry is posted twice,
ADJUSTING THE ACCOUNTS

Types of Adjusting Entries

 
1. Deferrals:
A. Prepaid expenses: Expenses paid in cash before they
are used or consumed.
B. Unearned revenues: Cash received before services
are performed. 
2. Accruals:
A. Accrued revenues: Revenues for services performed
but not yet received in cash or recorded.
B. Accrued expenses: Expenses incurred but not yet
paid in cash or recorded.
Illustration 3-3 Trial balance
Adjusting Entries for Deferrals
1. Deferrals
A. Prepaid/deferred expense
ii. Supply
Illustration: Yazici Advertising Inc. Inc. purchased
supplies costing 2,500 on October 5. Yazici recorded
the purchase by increasing (debiting) the asset
Supplies. This account shows a balance of 2,500 in the
October 31 trial balance. An inventory count at the
close of business on October 31 reveals that 1,000 of
supplies are still on hand.
II. Insurance 
Illustration: On October 4, Yazici Advertising Inc.
paid 600 for a one-year fire insurance policy. Coverage
began on October 1. Yazici recorded the payment by
increasing (debiting) Prepaid Insurance. This account
shows a balance of 600 in the October 31 trial balance.
Insurance of 50 ( 600 ÷ 12) expires each month.
iii. Depreciation
Illustration: For Yazici Advertising, assume that
depreciation on the equipment is  480 a year, or  40 per
month.
B. Deferred Revenue
i. Unearned Revenues
Illustration: Yazici Advertising Inc. received 1,200 on
October 2 from R. Knox for advertising services expected
to be completed by December 31. Unearned Service
Revenue shows a balance of 1,200 in the October 31 trial
balance. Analysis reveals that the company performed
400 of services in October.
2. Accruals
A. Accrued Revenues
i. A/R
Illustration:In October, Yazici Advertising performed
services worth  200 that were not billed to clients on or
before October 31
B. Accrued Expenses
i. Accrued Interest 
Illustration: Yazici Advertising signed a three-month
note payable in the amount of  5,000 on October 1. The
note requires Yazici to pay interest at an annual rate of
12%.
ii. Accrued Salaries And Wages 
Illustration: Yazici paid salaries and wages on
October 26 for its employees’ first two weeks of work.
The next payment of salaries will not occur until
November 9. As Illustration 3-19 shows, three working
days remain in October (October 29–31).
The Adjusted Trial Balance and preparations of Financial Statements