1. Discuss the components of the accounting cycle.
2. Analyze transactions.
3. Journalize transactions.
4. Post journal entries.
5. Prepare a trial balance.
6. Identify and correct errors in the accounting records.
7. Income statement
8. Accrual vs. Cash accounting
9. Revenue and matching principles
10. Income statement formats
1 THE ACCOUNTING CYCLE
Daily Activities End of Period
B USINESSACTIVITIES PREPARING
Buying, Selling, Borrowing, Hiring,
Firing, Advertising, Renting, ….etc.
- Has the financial position changed? PERFORMING
- Can we measured the effects in $?
ANALYZING T RANSACTIONS
- Identify the accounts involved FINANCIAL STATEMENTS
- Determine $$ and direction (+ , -)
JOURNALIZING CLOSING THE
(Apply the double entry rules) ACCOUNTING BOOKS
- Assets, Expenses, Dividends: (+
Debit, - Credit)
- Liabilities, Revenues, Equity: (+
Credit, - Debit)
POSTING TO THELEDGER
Enter the amount of each account of the
Journal entry on theide of the
corresponding T account in the Ledger.
2 T RANSACTION ANALYSIS AND JOURNALIZING
A business transaction is any transaction conducted in the course of business.
An accounting transaction is an event that affects the financial position of an entity.
The set of accounting transactions is a subset of business transactions. That is, all
accounting transactions are business transactions, but not all business transactions are
accounting transactions. You can identify a business transaction as an accounting
transaction by identifying at least one affected element of financial statements.
Transactions are recorded first in the journal in a chronological order.
Each transaction affects at least two accounts (double entry).
Each transaction has counterbalancing entries that keep total assets equal to total
liabilities and owners’ equity. That is, the accounting equation must be balanced
after recording each transaction.
Transaction analysis involves these steps:
For each transaction determine:
specific accounts are affected,
the amount of the change in each account, and
whether the account balances are increased or decreased
Apply the rules of debit and credit (See Figure 1)
the rules of debit and credit keep the accounting equation in balance
Debit and credit signify directions -- debit for left and credit for right.
The type of account determines the side on which increases and decreases
Some transactions may require only increases or only decreases.
Write the transaction in the journal
Listing first the debit accounts in the upper left corner and then the credit
accounts in the lower right corner.
Notice that the total amounts of debits should equal the total amounts of
An example of a journal entry:
Dr. Cash 10,000
Cr. Accounts Receivable 10,000
The following observations follow from the above entry:
1. We do not state which account increased or decreased. Rather, using the debit
and credit rules we know that the above journal entry is to record a transaction
where cash increased and accounts receivable decreased.
2. We do not put the dollar sign before the amounts, because all amounts reported in
journal entries are in dollars.
3 Figure 1
The Double-Entry Bookkeeping rules
I. ALANCE SHEET ITEMS :
If an ASSET account Increaseditke Debit, and if Decreased make it Credit.
If a LIABILITY account Increaseditke Credit, and if Decreased make it Debit.
If a CAPITAL account Increaseditke Credit, and if Decreased make it Debit.
II.INCOME S TATEMENT ITEMS :
If anEXPENSE account Increasmditke Debit, and if Decreased make it Credit.
If aREVENUE account Increasmditke Credit, and if Decreaseditke Debit.
III.DIVE DENS D ECLARED :
If a company declared DIVIDENDS make it Debit (Regardless of whether they are paid or not)
4 P OSTING JOURNAL E NTRIES TO THE L EDGER
The ledger is an accounting book (a set of notebook pages) in which each account
is listed separately (in a separate page).
Posting is the process of copying (transferring) journal entries to Ledger accounts.
In this phase of the recording process, the accountant accumulates the effects of
journalized transactions in the individual accounts.
Debits in the journal are posted as debits to the appropriate accounts; credits in the
journal are posted as credits to the appropriate accounts.
The following figure illustrates how ledger accounts would appear.
Debit Account Name Credit
Debit entries Credit entries
The balance of an account is the difference between total debit entries and total
The normal balance of an account is the side used to record increases.
Often, a shift of a balance amount away from its normal column indicates there
has been an accounting error made.
Every account balance is derived from four components:
1. Beginning balance
3. - Decreases
4. = Ending balance
For example, if cash at the beginning of the period is $2,000, cash receipts during the
period total $26,000, and cash disbursements are $25,000, then ending cash is $3,000. If
you know any three of the four components, you can calculate the fourth. You can also
see these relationships by recording this information in a T-account for Cash.
5 Below are examples of the above equation for few accounts
Ending Accounts Receivable = Beginning Accounts Receivable + Credit Sales (or
services) – Collections from customers
Ending Accounts Payable = Beginning Accounts Payable + Purchases on account –
Payments to suppliers
Ending office supplies = Beginning Office Supplies + Purchases of Office Supplies –
Office Supplies Expense
Ending Retained Earnings = Beginning Retained Earnings + Net Income (or – Net Loss)
6 P REPARING THE TRIAL BALANCE
The trial balance is a list of all accounts and their balances at a given time
(typically at the end of the accounting period).
The trial balance is not one of the four financial statements, but merely a tool to aid
the accountant in the preparation of the financial statements.
Effects of Errors
Unequal column totals indicate at least one error. Some common errors are:
3. Omitting or entering account balances in the wrong column of the trial
Equal trial balance totals prove only that debits posted to accounts equal credits
posted to accounts; equal totals prove whether debit balances in the accounts equal
Errors in transactions that have equal debits and credits will not be revealed by
Errors that are not counterbalanced will keep the balance sheet incorrect until
correcting entries are made.
When a journal entry contains an error, it cannot be erased or crossed out;
particularly if the error is detected after the entry is posted to the ledgers.
If the error is detected, a correcting entry must be made, which counteracts the
incorrect entry to correct the account.
The following tips can be helpful to detect simple mistakes. Do the following if the
total debits does not equal the total credits (all these tips assume that the balances in
the trial balance are integers):
o Divide the difference between the debits and credits by 2. If the difference
is an integer, then possible error is posting a debit as a credit or vice versa.
Look for the difference divided by two in the trial balance.
o Divide the difference between debits and credits by 9. If the difference is
an integer, there are two possibilities. The first possibility is either too
few or too many zeros. For example, if the correct amount is 250 and it
was posted at 25, the differe