Unit 4 The Accounting Cycle

Orcutt Academy High School Accounting & Finance

4-1 Source Documents

What are Source Documents? ◦ Invoice

◦ Receipt

◦ Deposit Slip

◦ Check Counterfoil

◦ Statement

◦ Payment Confirmation

Why Source Documents

The first documents that exist relating to a transaction.

Serve as proof for a transaction ◦ Include date and time

Invoices

Normally relate to credit transactions

List goods or services provided and their prices.

Suppliers normally send an invoice with goods (or once services have been delivered)

Indicate payment terms (time, # of payments, etc…)

“Bills”

Receipts

Confirm that services or goods have been received.

Normally relate to cash transactions.

Deposit Slip

Proof that cash, including currency and checks, has been deposited in a bank account.

Check Counterfoil

This is the part of the check kept by the drawer (writer) of the check as a record of the transaction.

Statement

A report showing ◦ the amount owed by one business to another

◦ details of transactions between the two businesses

Payment Confirmation

Proof of Internet transactions

4-2 Accounting Journals

What are Journals?

Debits and Credits in Chronological Order

Used to be an actual book.

Now accountants record journal entries using an accounting program.

Purpose

Purpose ◦ To keep a day-to-day record of a business and its transactions.

Includes a brief explanation. ◦ Should accurately describe what took place, so that anyone who glanced at it for the first time could easily identify what occurred.

Supporting Documents & Folio Numbers

Each journal can be matched to the relevant supporting document ◦ Check counterfoil, receipt, etc…

A cross-referencing code or folio number is included.

This code or folio number simply cross-references between one document and another.

Supporting Documents & Folio Numbers

If this transaction of $15,000 capital was made by issuing check number 38, then one could write “Ch-38” (for example) under the folio number.

Why include folio numbers?

To easily trace the recorded transaction back to the source document

To verify that the transaction actually took place.

Folio Numbers for Accounts

Each specific account, such as bank, would have its own folio number

Used to cross reference from the journal entry involving “bank” to the bank’s account in the ledger ◦ This will be covered in the next section.

Make it simple to trace information through the steps in the accounting cycle.

Cross-Referencing Accounts

“Sal-1” is the individual code for the account “salaries.” “J-1” is the code for “journal page 1.”

One could follow information from the journal entry to an account in the ledger, or from an account in the ledger back to the journal entries.

The Different Journals

1. Cash Receipts Journal – for all cash receipts.

2. Cash Payments Journal – for all cash payments.

3. Sales Journal – all sales on credit (debtor)

4. General Journal – for all transactions not falling under any of the above journals.

(There are other journals we will not be using in this class)

Cash Receipts Journals

Where you record all cash that has been received. Major categories of receipts, such as from income or

from debtors, receive their own column. The category called “sundry” is used to represent less

regular items, such as capital or receiving cash from a loan. ◦ The word sundry means “various,” “miscellaneous” or

“general.”

The “bank” column is added up to show the total cash received for the period concerned.

Cash Payments Journal

Where you record all transactions where cash has been paid out.

Cash Book & Petty Cash

The cash receipts journal and cash payments journal can be replaced by the cash book, which is simply a combination journal showing all receipts and all payments together.

Petty cash, which is simply a sum of cash on hand kept to pay small expenses, can also have its own separate journal.

General Journal

Where you record any transaction that does not fall under the other journals.

Record the name of the account and the amount under either Debit or Credit

4-3 Ledger (T-Accounts)

What is a ledger?

A whole bunch of T-accounts grouped together.

The main ledger is called the general ledger. Virtually all T-accounts in a business fall under the general ledger.

T-Accounts

A visual aid for seeing the effect of debits and credits on a particular account.

Every transactions affects two or more accounts, so it is recorded in two or more T-accounts

Cash and Notes Payable T-Accounts

On June 1, 2012 a company borrows $5,000 from its bank.

On June 2, 2012 the company repaid $2,000 of the bank loan.

4-4 Balancing T-Accounts

In Practice

In practice we would not put each individual transaction concerning bank into the “bank” T-account. Instead, we would simply take the total of cash receipts from the cash receipts journal (column “bank”) and insert this on the debit side of the “bank” T-account. We would likewise take the total of cash payments from the cash payments journal (column “bank”) and insert this on the credit side of the “bank” T-account.

George’s Catering

The “total” from the cash payments journal

The “total” from the cash receipts journal

George’s Catering

Debit Balance – Cash Payments

$39,800 – $20,700 = $19,100

Balance b/f (bring forward)

◦ The closing balance of the bank account prior to the transactions

Debit Balance $4,300+$35,500=$39,800 Credit Balance $20,700+$19,100= $39,800

George’s Catering

How much money you have in the bank!

Debit Balance – Cash Payments

$39,800 – $20,700 = $19,100

Create Bank T-Accounts for Jamaal’s & Tobey’s

Balance b/f for each company is $5,000

Jamaal Allen’s Photography ◦ Cash Receipts: $20,800

◦ Cash Payments: $9,225

Tobey’s Catering ◦ Cash Receipts: $22,300

◦ Cash Payments: $3,495

4-5 Trial Balance & Financial Statements

Trial Balance Financial Statements: 1. Income Statement

2. The Statement of Changes in Owner’s Equity 3. Balance Sheet

4. Cash Flows Statement

Trial Balance

Complete trial balance prior to creating financial statements.

Test of balances ◦ Ensures Debits = Credits

◦ Uses closing balances from the general ledger (T-accounts)

Trial Balance for George’s Catering

Debits = Credits

1. Income Statement

Shows profit or loss of a business Includes income and expenses Accounting period

◦ Usually 1 year

2. The Statement of Changes in Equity

Changes to owner’s equity ◦ Capital ◦ Drawings ◦ Profit

Income - Expenses

3. Balance Sheet

Whereas the income statement and statement of changes in equity show changes over a certain period of time, the balance sheet shows the balances of assets, liabilities and owner’s equity on a particular day.

4. Cash Flows Statement

A statement (report) of flows (both in and out of the business) of cash.

Includes ◦ Operating

◦ Investing

◦ Financing

◦ Net Increase/Decrease in cash