| Accounting cycle |
Accounting cycle refers to
the process of recording accounting transactions.
1. Analyze transactions to identify the debit and credit components
2. Record journal entries in the accounting journal
3. Transfer debit and credit amounts to each account in accounting
ledger
4. Prepare adjusting journal entries
5. Prepare a trial balance
6. Prepare financial statements by transferring balances from the trial
balance to appropriate financial statements
7. Close temporary accounts and transfer revenue and expense account
balances to retained earnings account
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| Accounting cycle |
Accounting cycle by key
word
1. Analyze the transaction
2. Journal entries
3. Posting to accounting ledger
4. Adjusting journal entries
5. Trial balance
6. Financial statements
7. Close temporary accounts
|
| Debit or credit |
Debit accounts include
asset, expense accounts
Credit accounts include liability, equity, revenue accounts
|
| Debit or credit |
Debit is recorded on the
left side of journal entry and t-account
Credit is recorded on the right side of journal entry and t-account
|
| Debit or credit |
On the trial balance, left
side lists the balances of all debit accounts
On the trial balance, right side lists the balances of all credit
accounts
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| Accounting equation |
Left side of the equation
is equal to left side of the equation
Left side total = Right side total
Debit accounts are recorded on the left side of accounting equation
Credit accounts are recorded on the right side of accounting equation
Accounting equation means
Debit accounts total = Credit accounts total
|
| Journal entry |
Accounting transactions
are recorded in the form of a journal entry
Journal entry is an entry to the accounting journal
Accounting journal is a collection of all journal entries
All accounting journal entries have two sides, debit and credit
For each accounting journal entry, the total of debit sides is equal to
the total of credit sides
debit side total = credit side total
If debit side total is not same as the credit side total, the journal
entry does not balance and the journal entry is not accurate.
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| Accounting ledger |
Accounting ledger is a
collection of accounts with their debit and credit balances
General ledger keeps all accounts
Subsidiary ledger keeps detailed information about certain accounts
An example:
General ledger keeps a sales revenue account for all customers and
products
Sales revenue subsidiary ledger keeps sales revenue information by
customers or by products
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| Posting |
Posting is the process of
moving the balances of journal entries to appropriated accounts in the
ledger
An example of journal entry
(Debit) Cash 2,000
(Credit) Sales 2,000
$2,000 debit balance is posted to the cash account in the general ledger
$2,000 credit balance is posted to the sales revenue account in the
general ledger
|
| Adjusting journal entries |
At the end of period, some accounts are
required to make adjustments on their balances to reflect correct
amounts under accrual basis of accounting
Journal entries to adjust account balances to reflect correct amounts
under accrual basis of accounts are called "adjusting journal entries"
An example
Entity A borrowed $300,000 dollars on December 1, 20X1
Interest on the borrowings is scheduled to be paid on February 28, 20x2
Interest amount for three months is $3,000
Prepare an adjusting journal entry on December 31, 20X1
(Debit) Interest expense
1,000
(Credit) Interest payable
1,000
$1,000 interest expense is accrued at the end of December 20X1
even if cash payment is not required until February 28, 20X2
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| Trial balance |
Trial balance lists the balances of all
accounts in the general ledger
Trial balance has two sides, debit and credit
Accounts with debit balances are listed on the debit side of trial
balance
Accounts with credit balances are listed on the credit side of trial
balance
Trial balance is used to check whether the debit side total is equal to
the credit side total
If debit side total ≠
credit side total, trial balance includes errors
However, having debit side total = credit side total does not guarantee
that the trial balance is error free
An example
When the correct amount of cash sales is $2,000, if this amount was
recorded as $3,000 by error, trial balance may still balance with
incorrect amounts
(Debit) Cash
3,000
(Credit) Sales
3,000
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| Balance sheet |
Amounts on the trial balance are
transferred to appropriate financial statements for reporting
Asset accounts are transferred to balance sheet
Liability accounts are transferred to balance sheet
Equity accounts are transferred to balance sheet
|
| Income statement |
Revenue accounts are transferred to
income statement
Expense accounts are transferred to income statement
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| Permanent accounts |
The balances of asset accounts, liability accounts,
equity accounts are accumulated beyond the current accounting period
Accounts whose balances carry over beyond the current accounting period
are called permanent accounts
|
| Temporary accounts |
Revenue accounts, expense accounts are
closed at the end of current accounting period
Accounts whose balances do not carry over beyond the current accounting
period are called temporary accounts
Balances of temporary accounts are transferred to "income summary"
account at the end of accounting period
Journal entries to transfer balances of temporary accounts to "income
summary" account are called "closing journal entries"
Once the balances of revenue and
expense accounts are transferred to "income summary" account, revenue
and expense accounts are closed with zero balances
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| Real accounts, Nominal accounts |
Permanent accounts are also called as
"real" accounts
Temporary accounts are also called as "nominal" accounts
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