STEPS IN THE ACCOUNTING CYCLE
THE ACCOUNTING CYCLE
ANALYZING
TRANSACTIONS
• Accounting deals only with economic
transactions.
• Did you pay or receive money?
• Are you owed or do you owe money?
• If any of these circumstances exist,
you must record the transaction.
1. Analyse
transactions
STEPS IN THE ACCOUNTING CYCLE
1. Analyse
transactions
2. Journalize
transactions
RECORDING
TRANSACTIONS
• All accounting transactions must be
recorded in the General Journal.
• We call this JOURNALIZING.
(Creative, eh?)
RECORDING
TRANSACTIONS
• Every transaction, and therefore every
Journal entry, will affect at least two
different accounts.
• Each type of account will have a normal
DEBIT balance or a normal CREDIT balance,
depending on the type of account it is.
• The normal balance side is the side the
account will increase on.
JOURNALIZING
TRANSACTIONS
• We journalize each and every
transaction using the DOUBLE-ENTRY
ACCOUNTING method.
• This means that every journal entry
you make must have (at least) one
DEBIT entry and (at least) one CREDIT
entry.
2016
Jan.1 Cash
F.K. McPhee, Capital
10,000
10,000
To record owner’s investment
Jan.2 Equipment
Cash
8,000
8,000
To record purchase of equipment
Note: the set up of the GJ is very important. Each simple
entry (that is, affecting just two accounts) will take three lines.
Do not put anything in the Posting Reference column until
you post your entries to the General Ledger.
When you post, you will put the General Ledger account
number (that is, of the account to which you post) in that
column.
STEPS IN THE ACCOUNTING CYCLE
1. Analyse
transactions
2. Journalize
transactions
3. Post to ledger
accounts
POSTING
TRANSACTIONS
• Once you have journalized your
transactions, you must post each journal
entry to the GENERAL LEDGER accounts
affected.
• Every every Journal entry will be posted to
at least two different GENERAL LEDGER
accounts.
• For simplicity’s sake, we sometimes use Taccounts.
STEPS IN THE ACCOUNTING CYCLE
Do not put anything
DR
Jan.1
10,000
J1 10,000
Jan.2 in the Explanation
8,000 DR
2,000
J1
column!
The reference to DR or CR is with respect to the BALANCE not the entry.
Jan.2
J1
8,000
DR
8,000
1. Analyse
transactions
2. Journalize
transactions
3. Post to ledger
accounts
4. Prepare trial
balance
Jan.1
J1
10,000
CR
10,000
PREPARING A TRIAL
BALANCE
• Once you have posted each journal entry
to the GENERAL LEDGER accounts
affected, you must prepare a TRIAL
BALANCE.
• A Trial Balance simply proves that the
debit and credit entries you have made
equal each other.
PREPARING A TRIAL
BALANCE
• A Trial Balance is a list of all accounts and
their balances.
• Accounts are listed in the order in which
they appear in the General Ledger:
Current Assets, Fixed Assets, Liabilities,
Owner’s Equity, Drawings, Revenues,
Expenses
This is for illustration purposes
only.
Do not include accounts with
zero balances.
Based on the entries for Fitness
King so far, this is really what our
Trial Balance would look like.
PREPARING THE
INCOME STATEMENT
• Once you have a Trial Balance, you can
prepare Financial Statements (Income
Statement, Statement of Owner’s Equity,
and Balance Sheet), however, you
probably want to wait until you have
done your adjusting entries
• Always do your Income Statement first.
STEPS IN THE ACCOUNTING CYCLE
1. Analyse
transactions
2. Journalize
transactions
3. Post to ledger
accounts
4. Prepare trial
balance
5. Journalize
and post
adjusting
entries
The accounts
are in the same
order as on the
Trial Balance
If there is only
one Revenue
account, put its
balance in the
right-hand
column.
ADJUSTING ENTRIES
• Because accurate Financial Statements
can only be made if we reflect income
and expenses earned and incurred
during a relevant reporting period
(month, quarter, year) we must make
ADJUSTING ENTRIES.
ADJUSTING ENTRIES
ADJUSTING ENTRIES
• We adjust for items that we have paid in
advance (prepaid rent, prepaid insurance)
• Or for which we have been paid in advance
(unearned revenues) (sometimes)
• Or for expenses that we have incurred but
still owe at the end of the reporting period
(employees’ salaries, utilities)
• We record adjusting entries just like regular
journal entries, except:
• They are always dated on the last date of
the reporting period (month, quarter, year)
• They always affect one balance sheet
account and one income statement account
(revenues and expenses).
• CASH is never affected by an adjusting entry.
WORK SHEET
STEPS IN THE ACCOUNTING CYCLE
1. Analyse
transactions
2. Journalize
transactions
3. Post to ledger
accounts
4. Prepare trial
balance
6. Prepare
adjusted trial
balance
5. Journalize
and post
adjusting
entries
ILLUSTRATION
Account Titles
Trial Balance
Debit
Credit
1. Prepare
trial balance
on the
worksheet.
Adjustments
Debit
Credit
Adjusted Trial Balance
Debit
Credit
2. Enter
adjustment
data.
3. Enter
adjusted
balances
Income Statement
Debit
Credit
Balance Sheet
Debit
Credit
4. Extend adjusted
balance to appropriate
columns.
5. Calculate income/loss
and complete the
worksheet.