THE ACCOUNTING CYCLE
A DAC 501: FINANCIAL ACCOUNTING
PRESENTATION.BY
HERICK ONDIGOSCHOOL OF BUSINESS, UoN
The Accounting Cycle
For a new business, it begin by setting up ledger accounts.
For an established business, begin with account balances carried over from the previous period.
The Steps In The Accounting Cycle
1. Analyze source documents & record business transactions in a journal
2. Post journal entries to the ledger accounts
3. Prepare unadjusted trial balance (TB)4. Journalize and post end of period
adjustments (EOPA)5. Prepare adjusted Trial Balance6. Prepare /Create financial statements &
reports from data in adjusted TB7. Journalize and post the closing entries8. Prepare the post-closing trial balance9. Prepare and post reversing entries
Detailed Steps in the Accounting Cycle
Analyze Business
Transactions.
Journalize transactions
in the journal.
Post entries to the
accounts in the ledger.
Prepare unadjusted
trial balance.
Prepare financial
statements.
Post-closing trial balance
Journalize and post closing
entries
Journalize and post adjusting
entries
Prepare adjusted
trial balance.
Analysis and Recording Business Transactions
Business transaction is an economic event that causes a change in the financial position
Financial Position: What the entity controls How the entity controls them (claims)
Fundamental Accounting Equation
ASSETS = EQUITIES
ASSETS = LIABILITIES + OWNERS' EQUITY
How do we use the “Accounting” equation?
Recall the Basic Accounting Equation:Assets = Liabilities + Shareholders’ EquityImplications:Total Asset=Claims against the assetsTherefore :If assets increase : either Liabilities and/or
Shareholders’ should also increase and vice versa
For example: borrow cash, cash (asset) will increase and Liabilities will increase
when it is paid back: cash (asset) will decrease and liabilities will decrease
How do we record/Account?
An ACCOUNT (ledger Account) : is an accounting device used to record changes in a of a specific asset, liability or owners’ equity item
Has 3 elements: title, debit side and credit side (also called the “T-Account”)
Changes in the accounts are entered manually into a book called a ledger or computerized ledger
Basic forms of book ledgers: the two-column account format, and the running format account
Chart of accounts
Definition of Ledger Account
Ledger Account Complete listing of business transactions for an
individual account Where you look if you want to find the balance of
any given accountGeneral Ledger
A loose-leaf book or computer file containing all the Ledger Accounts
Each account from the chart of accounts has its own ledger account in the general ledger
Complete listing of all account tittles and account names/codes used by an entity is called the chart of accounts - It is like a table of content in a book
Forms of Ledgers
Date Item Post. Ref. * Debit Date ItemPosting Reference Credit
Account No:Account
Left-hand or Right-hand or
Debit Side Credit Side
Account Name Account No:
Two-Column Account
T-Account form that depicts the two-column account:
How do accounts behave?
Assets = Liabilities + Shareholders’ Equity + + +
So Assets increase on the left hand or debit side then they decrease on the credit side
Assets
+ - debit credit
Behavior of Accounts cont…
Liabilities and Owners’ Equity accounts increase on the credit side, decrease on the debit side Liabilities or Owners’ Equity Accounts
- +
debit credit
Transaction Analysis and The Duality Concept
Double entry system states that every transactions affects at least two accounts.
Therefore • If an asset account increases (decreases),
because of duality concept there must be a corresponding:
1. increase(decrease) in a specific liability account
2. or a decrease(increase) in a another asset account
3. or an increase(decrease) in owners' equity account.
Accounting Is Fun!
What Is a General Journal?
The book in which a person enters the original record of a business transaction Commonly referred to as a book of original entry
Chronological listing of all the business transactions for the company Each listing records the debits and credits
associated with that business transactionA book or a location on a hard drive where
all business transactions are listed Like a diary
What’s in a Journal Entry?
1. Date2. At least one debit entry
Debit account, use exact account title, do not indent titles
3. At least one credit entry Credit account, use exact account title, indent titles
4. An explanation of the transaction: Check number Invoice number Accounts receivable customer name Many other elements OR details as appropriate… Remember: the accountant must leave a good audit
trail so that users of accounting information can understand what occurred with each transaction
DR=CRDR=CR
Illustration of the accounting process
1. On Jan 1 2010 Ms.Farida invested $100,000 at the inception of the business, Express Travel Agency
Event No
Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000Total 100.000 0 100.000
GENERAL JOURNAL Page 1Date Account Title and Description Acct.No. Debit Credit
1 Jan 2004Cash 100 100.000
Capital 500 100.000
Investment by the shareholders
2. On 1 January employed a full time secretary and a sales representative.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No changeTotal 100.000 0 100.000
3. On 1 January rented an office building and paid 3 months rent of $600.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No change3 +600 No change No change
-600 No change No changeTotal 100.000 0 100.000
GENERAL JOURNAL Page 1Date Account Title and Description Acct.No. Debit Credit
1 Jan 2004Prepaid Rent 180 600
Cash 100 600
Payment of 3 months of rent in advance
4. On 2 January office furniture and equipment is purchased for $ 15,000 , for which $ 5,000 is paid in cash and the rest would be
paid later in January and February 2010.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No change3 +600 No change No change
-600 No change No change4 +15.000 +10.000 No change
-5.000Total 110.000 10.000 100.000
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No Debit Credit
2 Jan 2004Furniture and Equipment 255 15.000
Cash 100 5.000 Accounts Payable 320 10000Purchase of furniture and equipment
5. On 3 January insured the office building and the equipment effective from 1 January to 31 December 2010 and paid $ 120 for the whole period.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No change3 +600 No change No change
-600 No change No change4 +15.000 +10.000 No change
-5.0005 +120 No change No change
-120Total 110.000 10.000 100.000
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
3 Jan 2004Prepaid Insurance 180 120
Cash 100 120Purchase of insurance policy
6. On 5 January the company signed an agreement with Keya Airline to sell their airline tickets and receive commissions in return.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No change3 +600 No change No change
-600 No change No change4 +15.000 +10.000 No change
-5.0005 +120 No change No change
-1206 No change No change No change
Total 110.000 10.000 100.000
7. On 10 January Express Travel Agency borrowed $15,000 from the bank at an annual interest rate of 24% for six months. The principal and the interest of the loan will be paid together on 10 July 2010.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No change3 +600 No change No change
-600 No change No change4 +15.000 +10.000 No change
-5.0005 +120 No change No change
-1206 No change No change No change7 +15.000 +15.000 No change
Total 125.000 25.000 100.000
7. On 10 January Express Travel Agency borrowed $ 15,000 from the bank at an annual interest rate of 24% for six months. The principal and the interest of the loan will be paid together on 10 July 2010.
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
10 Jan 2004Cash 100 15.000
Bank Loan 300 15.000Borrowing from the bank
8. On 10 January purchased office supplies for $2.500 in cash.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No change3 +600 No change No change
-600 No change No change4 +15.000 +10.000 No change
-5.0005 +120 No change No change
-1206 No change No change No change7 +15.000 +15.000 No change8 +2.500 No change No change
-2.500Total 125.000 25.000 100.000
8. On 10 January purchased office supplies for $2,500 in cash.
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
10 Jan 2004Office Supplies 136 2.500
Cash 100 2.500Purchase of office supplies
9. During the first half of January the agency sold tickets to various customers and on 16 January issued a commission invoice to clients amounting to $5,000 that will be collected later in January 2010.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No change3 +600 No change No change
-600 No change No change4 +15.000 +10.000 No change
-5.0005 +120 No change No change
-1206 No change No change No change7 +15.000 +15.000 No change8 +2.500 No change No change
-2.5009 +5.000 No change +5.000
Total 130.000 25.000 105.000
9. During the first half of January the agency sold tickets to various customers and on 16 January issued a commission invoice to clients amounting to $ 5,000 that will be collected later in January 2010.
Left or Debit Side Right or Credit SideDecrease Increase
Revenue Accounts
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
16 Jan 2004Accounts Receivable 120 5.000
Commission Revenue 600 5.000Recognition of commission on ticket sales
10. On 20 January the company paid $5,000 for the furniture and equipment that were purchased on 2 January.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No change3 +600 No change No change
-600 No change No change4 +15.000 +10.000 No change
-5.0005 +120 No change No change
-1206 No change No change No change7 +15.000 +15.000 No change8 +2.500 No change No change
-2.5009 +5.000 No change +5.000
10 -5000 -5000 No changeTotal 125.000 20.000 105.000
10. On 20 January the company paid $5.000 for the furniture and equipment that were purchased on 2 January.
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
20 Jan 2004Accounts Payable 320 5.000
Cash 100 5.000Payment for an accounts payable
11. On 22 January received $7,500 from a customer for organizing the accounting conference that will be held on February 2, 2010.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No change3 +600 No change No change
-600 No change No change4 +15.000 +10.000 No change
-5.0005 +120 No change No change
-1206 No change No change No change7 +15.000 +15.000 No change8 +2.500 No change No change
-2.5009 +5.000 No change +5.000
10 -5.000 -5.000 No change11 +7.500 +7.500 No change
Total 132.500 27.500 105.000
11. On 22 January the company received $7.500 from a customer for organizing the accounting conference that will be held on 2 February 2010.
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
22 Jan 2004Cash 100 7.500
Unearned Revenues 340 7.500Receipt of advance payment from a customer
12. The company received the full payment of commission charged to Kenya Airlines of $ 5.000 on 23 January.
Event No Assets Liabilities Owners’ Equity
1 +100.000 No change +100.000
2 No change No change No change3 +600 No change No change
-600 No change No change4 +15.000 +10.000 No change
-5.0005 +120 No change No change
-1206 No change No change No change7 +15.000 +15.000 No change8 +2.500 No change No change
-2.5009 +5.000 No change +5.000
10 -5.000 -5.000 No change11 +7.500 +7.500 No change12 +5.000 No change No change
-5.000Total 132.500 27.500 105.000
12. The company received the full payment of commission charged to Kenya Airline s of $ 5,000 on 23 January.
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
23 Jan 2004Cash 100 5.000
Accounts Receivable 120 5.000Receipt of payment from a customer
13. On 24 January paid salaries of $ 9,000 employees in cash.
Event No Assets Liabilities Owners’ Equity
7 +15.000 +15.000 No change8 +2.500 No change No change
-2.5009 +5.000 No change +5.000
10 -5.000 -5.000 No change11 +7.500 +7.500 No change12 +5.000 No change No change
-5.00013 -9.000 No change -9.000
Total 123.500 27.500 96.000
13. On 24 January paid salaries of $ 9,000 employees in cash.
Left or Debit Side Right or Credit SideIncrease Decrease
Expense Accounts
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
24 Jan 2004Salary Expense 770 9.000
Cash 100 9.000Payment of salaries
14. During the second half of January the agency sold tickets to various customers and on 31 January issued a commission invoice to Kenya Airline amounting to $ 7,500 which will be collected in February 2010.
Event No Assets Liabilities Owners’ Equity
8 +2.500 No change No change-2.500
9 +5.000 No change +5.00010 -5.000 -5.000 No change11 +7.500 +7.500 No change12 +5.000 No change No change
-5.00013 -9.000 No change -9.00014 +7.500 No change +7.500
Total 131.000 27.500 103.500
14. During the second half of January the agency sold tickets to various customers and on 31 Jan sent an invoice to Kenya Airline amounting to $7,500 which will be collected in February 2010
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
31 Jan 2004Accounts Receivable 120 7.500
Commission Revenues 600 7.500Recognition of commission on ticket sales
15. Ms. Farida ( the proprietor) withdrew $ 3,000 on 31 January for her personal use.
Event No Assets Liabilities Owners’ Equity
7 +15.000 +15.000 No change8 +2.500 No change No change
-2.5009 +5.000 No change +5.000
10 -5.000 -5.000 No change11 +7.500 +7.500 No change12 +5.000 No change No change
-5.00013 -9.000 No change -9.00014 +7.500 No change +7.50015 -3.000 No change -3.000
Total 128,000 27,500 100,500
15. Ms. Farida withdrew $ 3.000 on 31 January for personal use.
Left or Debit Side Right or Credit SideIncrease Decrease
Owners' Withdrawals or Dividends
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
31 Jan 2004Withdrawals XXX 3,000
Cash 100 3,000Withdrawal by the owner
Summary of Journalizing
Steps:1. Determine the effects of transactions on
three components of the accounting equation,
2. Determine which specific accounts are affected, and
3. Assure that total of the increases should be equal to either increases on the other side of the equation or to decreases on the same side, or a combination there of.
Behavior of Accounts- SummaryAssets = Liabilities + Owners’ Equity + - - + -
+Dr Cr Dr Cr Dr Cr Expense Revenue + - - + Dr Cr Dr Cr
Withdrawals/Dividends + - Dr Cr
Accounting Cycle-Revisited
Analyze and record the transactions
Post the transactions and prepare trial balance
Adjust the accounts and prepare trial balance
Close the accounts and prepare trial balance
Prepare the financial statements
Posting -Defined
• The process of transferring figures from the journal to the ledger accounts
• It simply involves transferring data from one accounting entry into another
• The purpose is to classify and summarize transactions and events affecting specific elements of the financial statements
Four-Step Posting Process
1. Transfer transaction date to account’s date column
2. Transfer the debit/credit amount and calculate the new balance
3. Write journal page number in posting reference column of ledger as a cross-reference
4. Go back to journal and write account number in posting reference column of journal as a cross-reference
Cross-reference The ledger account number in the Post. Ref.
column of the journal and the journal page number in the Post. Ref. column of the ledger account
Posting to The Ledger illustrated GENERAL JOURNAL Page 1Date Account Title and Description Acct.No. Debit Credit
1 Jan 2004Cash 100 100.000
Capital 500 100.000
Investment by the shareholders
LEDGER - Cash Acc. No. 100
Date Description Ref Debit Credit Debit Balance
Credit Balance
1 Jan 2004Capital P 1 100,000 100,000
LEDGER - Capital Acc. No. 500
Date Description Ref Debit Credit Debit Balance
Credit Balance
1 Jan 2004Cash P 1 100,000 100,000
LEDGER - Cash Acc. No. 100
Date Description Debit Credit1 Jan Capital 100,0001 Jan Office rent 6002 Jan Office furniture and equipment 5,0003 Jan insurance expense 12010 Jan Bank loan 15,00010 Jan Office supplies 2,50020 Jan Accounts payable 5,00022 Jan Unearned Revenue 7,50023 Jan Acccounts Recievable 5,00024 Jan salaries expense 9,00031 Jan Withdrawal 3,000
Posting illustrated
Exercise
Post all the above transactions (journal entries) to the following ledger accounts: Prepaid Rent, Office supplies, Prepaid insurance, Office
Furniture & Equipment, Bank loan, Accounts Payable, Unearned Revenue, Capital, Withdrawals, Commission Revenue, & Salary Expense
Cast the ledger accountsDetermine the balances carried down (Bal c/d)
and balances brought down (b/d)Prepare a summary of the ledger balances in a
two columnar listing to derive the Trial Balance( TB)
Category of the Account Increase Recorded By
Normal Balance
Assets Debits Debit
Liabilities Credits Credit
Shareholders’ Equity
Capital Credits Credit
Dividends or Withdrawals Debits Debit
Revenues Credits Credit
Expenses Debits Debit
SUMMARY -Normal Balances of Accounts
Preparing a Trial Balance
List the ledger account balances in two columns on the trial balanceLeft column = DebitsRight column = Credits
Trial balance proves DR = CR
The Balancing of Accounts, The Trial Balance & Financial statements
Introduction: In the previous exercise , you have learned the
principles of double entry and how to post to the ledger accounts. The next step in our progress towards the financial statements is the trial balance.
Before transferring the relevant balances at the year end to the financial statements, it is usual to test the accuracy of the double entry bookkeeping records by preparing a trial balance. This is done by taking all the balances on every account. Due to the nature of double entry, the total of the debit balances will be exactly equal to the total of the credit balances.
The Balancing of Accounts & The Trial Balance
• Question: Once you have closed all the accounts, what would do?
• Answer: Prepare a Trial Balance• Question: What is a Trial Balance then? What is it for?
How does it look like?• Answer: A Trial Balance is a list of nominal ledger account
and their balances at a given date. It is usually prepared on the last day of the accounting period. It consists of a Debit and a Credit balance.
• Its purposes:• (1) It is prepared to check that the total of debit balances is the
same as the total of credit balances and offer reassurance that the double entry recording from day books has been done correctly.
• (2) For preparation of statement of income and the statement of financial position
The Balancing of Accounts & The Trial Balance
The rules to prepare the Trial Balance:
Total Debit Entries = Total Credit Entries
Debit Credit
Assets
Expenses
Drawings
Income/ Revenue
Liabilities
Capital
The Balancing of Accounts & The Trial Balance
Steps to preparing the Trial Balance:
1) Balance/cast ALL the ledger accounts in the books.
2) List all the Debit balances on the debit side and add them up.
3) List all the Credit balances on the credit side and add them up.
4) Ideally the trial balance should balance after step 3
The Balancing of Accounts & The Trial Balance
What if the trial balance shows unequal debit and credit balances?If the columns of the trial balance are not equal, there must be an error in recording or processing the transactions.4 Errors revealed by the trial balance:The errors revealed are those errors which cause the Trial Balance totals to disagree. (i.e do not balance) There are FOUR types of errors revealed by a trial balance:1) Posting to the wrong side of an account.2) Errors in calculation and balancing3) Incorrect amounts entered on one entry4) Omission of one entry.
The Balancing of Accounts & The Trial Balance
Question: How do we locate all of the above errors?
Answers: 1) Check day-book (journal) totals2) Check additions of Ledger accounts, ensure each balance is correct3) Check all ledger account balances have
been recorded in the Trial Balance.4) Check all balances have been entered in the Trial Balance on the correct side.5) Check additions have been done correctly
The Balancing of Accounts,& The Trial Balance
Question: Once you are sure there is no mistake made in the Trial Balance, what do you do in the next
step?
Answers: Prepare End of Period Adjustment & then prepare the following statements:
1) Statement of Income 2) Statement of Financial Position
In short, these are the steps:1) Trial Balance2) End of Period Adjustments 3) Statement of Income4) Statement of Financial position
The Balancing of Accounts & The Trial Balance
However, a trial balance will not disclose the following types of errors: (Errors not revealed by the trial balance)
1) Errors of omission Complete omission of a transaction, because neither a
debit nor a credit is made.
2) Errors of commission This happens when original figure incorrectly entered. (Correct double entries but incorrect
amounts were recorded)
The Balancing of Accounts & The Trial Balance
3) Compensating errors This happens where errors cancel out each other. (eg an
error of £100 is exactly cancelled by another £100 error elsewhere).4) Errors of principles This happens when the wrong type of account had been
used (eg the purchase of a motor van is debited to a expense account, such as motor expenses, rather than a fixed asset account)5) Complete reversal of entries
This happens when an account should be debited but was credited (and vice versa)
The Trial Balance
Accounts Debit CreditCash 102,280Accounts Receivable 7,500Office Supplies 2,500Prepaid Rent 600Prepaid Insurance 120Office Furniture and Equipment 15,000Bank Loan 15,000Accounts Payable 5,000Unearned Revenues 7,500Capital 100,000Withdrawal 3,000Commission Revenues 12,500Salary Expenses 9,000Total 140,000 140,000
Express Travel AgencyTrial Balance
31-Jan-10in $
THE END
THANK YOU