Introduction To FinancialAccounting Sarath Fall 2013
Lecture 3: The Accounting Cycle
The next two classes will cover the entire accounting cycle starting from journal entries and
finishing with the Balance Sheet, Income statement and Cash Flows Statement. This is
material covered in Chapters 2,3,4.
The steps are:
1) Enter events as they occur into a Journal
2) Post the entries from the Journal into a ledger
3) Conduct a trial balance to make sure debits and credits add up (i.e. fix errors either in
journalizing or in posting).
4) Prepare adjusting entries for significant economic events that have not been recorded.
5) Prepare closing entries and prepare financial statements.
We will first do a simple example explaining the whole process, then each of the steps in
detail and finis next class with some complete examples from Chapter 4.
1) The First Bank of Rutgers was started on Jan 1, 2009 with a $10 million contribution
2) During the year, the bank attracted deposits of $4 million from individual customers
and made loans of $12 million to small businesses. If we don’t need to repay the
money then it is a liability. Anything that brings you money in the future is an asset.
(Anything that is receivable is an asset).
3) At the end of 2009, the bank earned interest of $1,000,000 (in cash) and paid interest
(in cash) of $100,000 to depositors.
4) The rent paid for the year was $200,000 and salaries paid were $350,000
5) The FBR paid taxes at a rate of 30%.
Prepare journal entries, postings, closing entries for this setting on Dec 31,2009.
Suppose instead that the bank collected only $750,000 of interest owed in cash. The
remainder will be paid January 31, 2010. Also, the bank paid two years of rent in advance
and a security deposit of $100,000 which will be refunded on Dec 31, 2011.
Prepare journal entries, postings, c