Accounting Cycle

List the nine steps of the accounting cycle in order.

1 Analyze the transaction; 2 Journalize; 3 Post to the general ledger; 4 Unadjusted trial balance; 5 Adjusting journal entries; 6 Adjusted trial balance; 7 Financial statements; 8 Close temporary accounts; 9 Post-closing trial balance.

Which cycle steps run all year, and which happen only at period end?

Steps 1–3 run continuously (analyze, journalize, post). Steps 4–9 are period-end: the two trial balances, AJEs, statements, closing, post-closing TB.

Does the accounting cycle differ between U.S. GAAP and IFRS?

No — the steps are identical regardless of the standards used.

What is a transaction?

An economic event involving a change in an asset, liability, or stockholders' equity account that the company records in its accounting records.

Write the basic AND the expanded accounting equation.

A = L + SE. Expanded: Assets = Liabilities + Contributed Capital + Accumulated OCI + Beginning RE + Revenues & Gains − Expenses & Losses − Dividends Declared.

Give the ending retained earnings equation. What is a negative balance called?

Ending RE = Beginning RE + Revenues + Gains − Expenses − Losses − Dividends declared. A negative RE balance is a deficit.

What does 'double-entry system' mean?

Every transaction affects at least two accounts and the accounting equation always balances — if an asset increases, another asset decreases or a liability/equity increases.

Collecting an account receivable — effect on the equation? Revenue?

Asset swap: Cash up, AR down. Total assets unchanged; NO revenue (it was recognized when the service/product was provided).

Collecting cash in advance of providing the service — effect?

Cash up AND a liability (deferred revenue) up. No revenue until control transfers.

What do 'debit' and 'credit' actually mean?

Left side and right side of an account. Nothing more — increase/decrease depends on the account type.

Which accounts increase with a DEBIT?

Assets, expenses and losses, and Dividends. (DEA of DEALER.)

Which accounts increase with a CREDIT?

Liabilities, equity (common stock, retained earnings), and revenues and gains. (LER of DEALER.)

What is a 'normal balance'? Give the normal balance of Dividends, Accumulated Depreciation, and AOCI.

The side that increases the account (its expected balance). Dividends: debit. Accumulated depreciation: credit (contra-asset). AOCI: can be either debit or credit.

What are the format rules of a journal entry?

Date first; debited accounts listed first at the left; credited accounts next, indented; amounts in debit/credit columns; brief explanation below. Debits must equal credits.

What is the chart of accounts and how is it ordered?

A numerical listing of account names/numbers to locate accounts in the ledger — numbered in balance sheet order: assets, liabilities, equity, then dividends, revenues, gains, expenses, losses.

Why is nothing on the financial statements without a journal entry?

Journal entries are HOW recognition happens — the statements are built from ledger balances, and only journal entries change the ledger.

Selling inventory for more than its cost: what two entries are required?

(1) DR Cash or AR / CR Sales Revenue at the selling price. (2) DR Cost of Goods Sold / CR Inventory at the inventory's COST.

Dividends DECLARED but not yet paid — the entry? And at payment?

Declaration: DR Dividends / CR Dividends Payable (equity falls now). Payment: DR Dividends Payable / CR Cash (no equity effect — just kills the liability).

What is the general ledger, and what is posting?

The ledger contains ALL accounts, each showing its increases, decreases, and balance. Posting transfers journal-entry information into those individual accounts.

What are the three parts of a T-account?

The account title, a left (debit) side, and a right (credit) side.

When does an account have a debit balance? Credit balance? Zero?

Debit balance when total debits exceed credits; credit balance when credits exceed debits; zero when they're equal.

What is a trial balance, and in what order are accounts listed?

A listing of all accounts and their ending debit/credit balances at a point in time — balance sheet accounts first (assets, liabilities, equity, dividends), then income statement accounts. It is an internal summary, NOT a financial statement.

What does a trial balance prove — and what does it NOT prove?

It proves total debits = total credits (a check on the recording process). It does NOT prove accuracy.

Name the five errors a trial balance will NOT reveal.

(1) A transaction never journalized; (2) a correct entry never posted; (3) an entry posted twice; (4) debits/credits to the wrong accounts; (5) wrong-but-equal dollar amounts on both sides.

On the unadjusted AND adjusted trial balances, what balance does Retained Earnings show?

The BEGINNING balance. RE is not updated until the closing entries (step 8).

Why is cash-basis accounting unacceptable under GAAP?

It measures cash receipts/disbursements, not economic activity, and net income can be manipulated by timing payments and billings. GAAP requires the accrual basis.

Under accrual accounting, when are revenues and expenses recognized?

Revenues when control of the goods/services transfers to the customer; expenses when incurred — regardless of when cash moves.

Why do adjusting journal entries exist, and when are they recorded?

GAAP requires accrual-basis statements, and periodicity cuts life into artificial periods — so at each period end, AJEs put revenues/expenses into the right period.

The two iron rules of every AJE in this course.

(1) Every AJE affects exactly one balance-sheet account and one income-statement account. (2) An AJE never touches Cash.

Name the four AJE categories (plus the special case).

Deferred (prepaid) expenses; deferred (unearned) revenues; accrued expenses; accrued revenues. Depreciation/amortization is a special deferred-expense pattern using a contra-asset.

Deferred EXPENSE: definition, entry, and what's misstated if you skip it.

Cash paid BEFORE the expense is incurred (prepaid rent/insurance, supplies). AJE: DR Expense / CR Asset. Skipped: assets overstated, expenses understated.

Deferred REVENUE: definition, entry, and misstatement if skipped.

Cash received BEFORE revenue is earned (subscriptions, advance collections). AJE: DR Deferred Revenue (liability) / CR Revenue. Skipped: liabilities overstated, revenues understated.

Accrued EXPENSE: definition, entry, misstatement if skipped.

Expense incurred BEFORE cash is paid (salaries, utilities, interest). AJE: DR Expense / CR Payable. Skipped: liabilities understated, expenses understated.

Accrued REVENUE: definition, entry, misstatement if skipped.

Revenue earned BEFORE cash is received (services provided, unbilled). AJE: DR Receivable / CR Revenue. Skipped: assets understated, revenues understated.

Define depreciation. What account takes the credit, and why?

The systematic and rational allocation of a long-term operating asset's cost over its useful life. Credit Accumulated Depreciation, a contra-asset, so the asset's original cost stays visible; carrying value = cost − accumulated depreciation.

What are depletion and amortization?

Same idea as depreciation for other assets: depletion allocates a natural resource's cost; amortization allocates an intangible asset's cost (credit accumulated amortization or the intangible directly).

What is the adjusted trial balance and what is it for?

The listing of all accounts/balances AFTER posting AJEs — proves DR = CR and contains every number needed to prepare the financial statements.

In what order are the financial statements prepared, and why?

(1) Statement of net income; (2) statement of stockholders' equity (needs NI); (3) balance sheet (needs ending RE); (4) statement of cash flows. Each feeds the next — articulation.

Where does the balance sheet's retained earnings number come from?

From the statement of stockholders' equity: Beginning RE + net income − dividends declared = ending RE.

Temporary vs. permanent accounts — define and give examples.

Temporary: all income-statement accounts plus Dividends; closed to zero each period. Permanent: all balance-sheet accounts; balances carry forward period after period.

Why close temporary accounts at all?

So next period's income statement starts from zero — prior-period revenues/expenses must not contaminate next year's net income.

State the four closing entries in order.

(1) DR each revenue/gain, CR Income Summary. (2) DR Income Summary, CR each expense/loss. (3) DR Income Summary / CR Retained Earnings for net income (reversed for a loss). (4) DR Retained Earnings / CR Dividends.

What is Income Summary, and where does it appear on the statements?

A temporary clearing account used only during closing to avoid cluttering RE; its balance after entries 1–2 equals net income (credit) or net loss (debit). It appears on NO financial statement.

What does the post-closing trial balance contain, and what does it prove?

Only permanent (balance-sheet) accounts — all temporary accounts are zero. It proves the equality of debits and credits after closing; RE is now updated.

Plush paid $72,000 on Jul 10 for 3-year insurance, coverage from Aug 1. Year-end AJE?

DR Insurance Expense 10,000 / CR Prepaid Insurance 10,000 — $72,000 ÷ 36 months × 5 months (Aug–Dec). Payment date is irrelevant; coverage start governs. Prepaid balance: 62,000.

Plush collected $25,000 on Jun 30 for a year of services; 30% performed by Dec 31. AJE?

DR Deferred Service Revenue 7,500 / CR Service Revenue 7,500 (30% × 25,000). Liability remaining: 17,500.

Plush: technician provided $35,000 of services never billed. AJE and category?

Accrued revenue: DR Accounts Receivable 35,000 / CR Service Revenue 35,000. AR goes 110,000 → 145,000.

Plush incurs $4,000 of salaries at year-end; payroll is Jan 2. AJE and category?

Accrued expense: DR Salaries Expense 4,000 / CR Salaries Payable 4,000. The expense belongs to THIS year even though cash moves next year.

Plush's checkpoint numbers: unadjusted TB, adjusted TB, NI, ending RE, total assets, post-closing TB.

Unadjusted 373,000; adjusted 420,000; revenue 167,500 − expenses 74,000 = NI 93,500; ending RE 131,500 (40,000 + 93,500 − 2,000); total assets 336,000; post-closing 344,000.

Ramses paid $36,000 on Jul 10 for a 3-year warehouse rental, occupancy from Aug 1. AJE?

DR Rent Expense 5,000 / CR Prepaid Rent 5,000 — 36,000 × 5/36 (Aug–Dec). Prepaid Rent ends at 31,000.

Ramses collected $15,000 on May 15 for an Aug 30 delivery, fully delivered by year-end. AJE?

DR Deferred Revenue 15,000 / CR Sales Revenue 15,000 — the entire advance is earned, so the liability goes to zero.

Ramses' five AJEs change revenue from 45,000 to what? Expenses to what? NI?

Revenue 115,000 (45,000 + 15,000 deferred earned + 55,000 accrued). Expenses 103,000 (12,000 COGS + 25,000 shipping + 41,000 commissions incl. 6,000 accrual + 5,000 marketing + 15,000 depreciation + 5,000 rent). NI = 12,000.

Ramses' checkpoint numbers: unadjusted TB, adjusted TB, ending RE, total assets, post-closing TB.

Unadjusted 263,000; adjusted 339,000; ending RE 98,000 (90,000 + 12,000 − 4,000); total assets 217,000 (incl. PP&E 50,000 − accum. depr. 15,000); post-closing 232,000.

TRAP you caught: why is 'DR Prepaid Rent 36,000 / CR Cash 36,000' wrong as a year-end AJE?

That's the ORIGINAL July transaction re-recorded. AJEs never touch Cash — the adjustment reallocates between the asset and the expense: DR Rent Expense 5,000 / CR Prepaid Rent 5,000.

TRAP you caught: why not credit PP&E directly for depreciation?

The credit belongs in Accumulated Depreciation (contra-asset) so the asset's original cost stays on the books; the balance sheet reports cost − accumulated depreciation = carrying value.

TRAP you caught: recording accrued revenue as 'DR A/R / CR Accrued Rev' — what's wrong?

'Accrued revenue' is a category, not an account. The credit goes to Revenue itself: DR Accounts Receivable 55,000 / CR Sales Revenue 55,000.

$24,000 two-year policy, coverage from Sep 1. Year-end insurance expense?

24,000 × 4/24 = 4,000. (Sep–Dec = 4 months of 24.)

Supplies: beginning 1,200; purchases 6,400; year-end count 2,100. Supplies expense and the AJE?

Available 7,600 − on hand 2,100 = 5,500 used. DR Supplies Expense 5,500 / CR Supplies 5,500.

$60,000 note at 8% taken out Oct 1; no interest paid by Dec 31. AJE?

DR Interest Expense 1,200 / CR Interest Payable 1,200 (60,000 × 8% × 3/12).

Collected $30,000 on Oct 1 for a 10-month service contract starting that day. Year-end AJE?

DR Deferred Revenue 9,000 / CR Service Revenue 9,000 (3 of 10 months earned).

Weekly payroll $45,000, five-day week paid Fridays; Dec 31 falls on Wednesday. AJE?

DR Wage Expense 27,000 / CR Wages Payable 27,000 (3/5 × 45,000 for Mon–Wed).

Prepaid insurance shows 15,000 unadjusted (12-month policy from May 1); adjusted balance is 5,000. Months expired and expense?

8 months (May–Dec): expense 10,000 = 15,000 × 8/12. Working backward: unadjusted − adjusted = the AJE amount.

Wilson's $24,000 two-year policy runs from Feb 1; 11 months expired. AJE?

DR Insurance Expense 11,000 / CR Prepaid Insurance 11,000 ($1,000/month × 11). Prepaid balance: 13,000.

Wilson has supplies of 1,115,000 available and 500,000 on hand at year-end. AJE?

DR Supplies Expense 615,000 / CR Supplies 615,000 (used = available − on hand).

Wilson's checkpoints: unadjusted TB, adjusted TB, NI, ending RE, post-closing TB.

20,170,600 → 20,940,600; NI 1,097,300 (revenue 3,360,000 − expenses 2,262,700); ending RE 1,047,300 (NI − 50,000 dividends); post-closing 18,627,900.

Buy $26,000 of furniture: $14,000 cash, $12,000 note to the vendor. Entry?

Compound entry — DR Furniture 26,000 / CR Cash 14,000 / CR Notes Payable 12,000.

Pay $6,500 of salaries that were ACCRUED last period. Entry — and is there an expense?

DR Salaries Payable 6,500 / CR Cash 6,500. No expense now — it was recognized when accrued.

Receive a $21,000 advertising bill for services already provided; will pay next month. Entry?

DR Advertising Expense 21,000 / CR Accounts Payable 21,000 — expense when incurred, not when paid.

Sold $37,000 of merchandise: customer pays half cash, half on account (ignore COGS). Entry?

DR Cash 18,500 / DR Accounts Receivable 18,500 / CR Sales Revenue 37,000.

Food Supplies: first-year NI 745,000; dividends declared and paid 60,000. Ending RE?

0 + 745,000 − 60,000 = 685,000.

AVA: revenue 733,200 and total expenses 410,300 have been closed to Income Summary; dividends are 58,000. Give closing entries 3 and 4.

Entry 3: DR Income Summary 322,900 / CR Retained Earnings 322,900 (733,200 − 410,300). Entry 4: DR Retained Earnings 58,000 / CR Dividends 58,000.

After closing entries 1 and 2, Income Summary has a DEBIT balance of 40,000. What does it mean and what's entry 3?

Expenses exceeded revenues — a 40,000 net LOSS. Entry 3: DR Retained Earnings 40,000 / CR Income Summary 40,000.

Which of these survive to the post-closing TB: Accumulated Depreciation, Depreciation Expense, Dividends, Deferred Revenue, Income Summary?

Accumulated Depreciation and Deferred Revenue (permanent BS accounts). Depreciation Expense, Dividends, and Income Summary are all zeroed.

Acme News collects $18,000 on Mar 1 for one-year subscriptions. Initial entry and the Mar 31 monthly entry?

Mar 1: DR Cash 18,000 / CR Deferred Subscription Revenue 18,000. Mar 31: DR Deferred Subscription Revenue 1,500 / CR Subscription Revenue 1,500 (18,000 ÷ 12).

A note payable of $40,000 is due in full next March. Where does it sit on a classified balance sheet prepared Dec 31?

Current liabilities — it matures within one year of the balance sheet date.

Why is the general journal called the 'book of original entry,' and what are its advantages?

Transactions are recorded there FIRST, in chronological order. Advantages: complete record with explanations for complex events; chronological order makes errors easier to locate and correct.

What goes in the ledger's reference column, and in the journal's?

Ledger: the general journal page number the entry came from. Journal: the account number — filled in only when posted (so it doubles as a 'posted' checkmark).

Deferred revenue goes by what other names?

Unearned revenue or advance collections. Same liability.

Give examples of deferred revenue businesses the book uses.

Magazine/newspaper subscriptions, airline/train tickets, insurance collected in advance, rent collected in advance, gift cards, season tickets.

What is a contra-asset account?

An asset account with a normal CREDIT balance that directly offsets a related asset; asset − contra = net carrying value (accumulated depreciation is the classic).

If equipment costs $96,000 with an 8-year life and no residual value, what's straight-line annual depreciation — and carrying value after year 1?

96,000 ÷ 8 = 12,000 per year. Carrying value: 96,000 − 12,000 = 84,000 (cost stays on the books; the contra grows).

The income statement is prepared 'single-step' in these problems — meaning?

All revenues listed, all expenses listed, one subtraction to net income — no intermediate subtotals like gross profit or operating income (those come later in the course).

On a classified balance sheet, what belongs to current assets in these problems?

Cash, accounts receivable, supplies, prepaid insurance/rent (benefits within a year). Equipment net of accumulated depreciation is noncurrent.

Why do companies bother with Income Summary instead of closing directly to RE?

To avoid running every revenue and expense detail through Retained Earnings — one clean net number (NI) transfers instead.

A $10,000/month flat-fee client pays on the 15th for the PRIOR month's services. On Dec 31 (monthly posting), what entries has December generated?

Dec 15: DR Cash 10,000 / CR AR 10,000 (collecting November's accrual). Dec 31: DR AR 10,000 / CR Service Revenue 10,000 (accruing December). Both — collection AND a new accrual.

A company accidentally posts only the DEBIT half of an entry. Will the trial balance catch it?

Yes — one-sided posting breaks DR = CR. (Contrast with the five errors the TB can't catch.)

Season tickets: $900,000 collected for 12 home games; 5 played by year-end. Revenue recognized and remaining liability?

Revenue 375,000 (900,000 × 5/12); deferred revenue remaining 525,000.

University professor hired at $144,000/year effective Aug 16, paid quarterly. Monthly-posting AJE at Aug 31?

DR Salaries Expense 6,000 / CR Salaries Payable 6,000 — half a month: 144,000 ÷ 12 × ½.

Landlord hasn't received December's $4,500 rent by Dec 31 (paid Jan 8). The landlord's AJE?

Accrued REVENUE for the lessor: DR Rent Receivable 4,500 / CR Rent Revenue 4,500. (Any utilities it owes are a separate accrued expense.)

Over the firm's whole life, why do cash and accrual income agree?

Every cash flow eventually meets its revenue/expense recognition; the bases differ only in WHEN they recognize, so lifetime totals converge.

The worksheet (Appendix B) — what is it, in one line?

An optional 10-column working paper (unadjusted TB | adjustments | adjusted TB | income statement | balance sheet) that organizes steps 4–7; it's a tool, not a required record.