Chapter 1 : The Accounting Cycle

1st step in the Accounting Cycle

Analyzing and Journalizing business transactions

What is journalizing

The chronological recording of business transactions

What is the General Journal

The daily record of business transactions that shows in the one place the complete debit and credit effect of each transactions on business in chronological order

Perpetual Inventory System

Continual or perpetual inventory record is maintained

Any time an item is removed/added will be reflected in the Merchandise Inventory account

Periodic Inventory System

The ending inventory is determined by a physical count of merchandise on hand at the end of the accounting period

The balance is only known at the beginning and end of the period

2nd step in the Accounting Cycle

Posting to the General Ledger

What is posting

Is the process of transferring journal entries to the ledger accounts

What is a ledger

Also known as the book of final entry ; all accounts are listed and maintained

What is an account

An accounting tool used to record increases and decreases to individual accounting records in a specific asset, liability, or owner's equity

2 possible forms of general ledger

1. Running balance form

2. Standard Form

What is the chart of accounts

A financial tool that provides a complete listing of every category of account title in the general ledger

T accounts

used in lieu of the general ledger accounts, to analyze transactions

What is a trial balance

list of open accounts in the ledger that is prepared to verify the equality of debits and credits

Third Step in the Accounting Cycle

Trial Balance Preparation

Account Balance

the difference between the total debits and credits in the trial balance

Characteristics of a Trial Balance

1. It is the list of accounts

2. The list of accounts are unclassified

3. The accounts listed normally are those with open balances

4. The accounts are listed in ledger orders

Fourth Step in the Accounting Cycle

Worksheet Preparation

What is a worksheet

a multicolumn devise used to systematically assemble the accounting data used in the adjustment process, financial statements preparation and closing entries

Another term form worksheet

Working paper / Temporary Accounting Record

What is the optional step in the accounting cycle?

Worksheet preparation

2 basic forms of a worksheet

8 column and 10 column

Fifth Step in the Accounting Cycle

Journalizing and Posting Adjusting Entries

Time Period Assumption

convenient assumption of dividing the economic life of a business into artificial time periods known as "reporting or accounting period"

businesses should report their financial position, results of operations, and cash flows at regular intervals

Accrual basis of accounting

recognizes income when EARNED and expenses when INCURRED — not when money or cash is actually received or paid

What does to accrue man?

to collect and accumulate

What are adjusting entries?

entries required at the end of each accounting period to recognize the accrual basis revenues and expenses for the period and to record the proper amounts of assets, liabilities, and owner's equity accounts

Sixth Step in the Accounting Cycle

Financial Statements Preperation

What are financial statements?

are used in informing interested people about the business operations and financial condition of the company

Statement of Profit or Loss

Also known as the Income Statement

the results of the business operations are summarized and reported whether it earned profits or earned losses on a specific time period

Statement of Comprehensive Income

in case the business has reported any other comprehensive income items in accordance with accounting standards

includes the profit or loss, plus the other comprehensive income

Statement of Financial Position

Also known as the Balance Sheet

shows what the business is worth in terms of the properties it owns (assets), the debts it owes (liabilities), and the investment of its owners (proprietorship) as of a specific date

Statement of Changes in Equity

presents a summary of the changes that occurred in the owner's capital (equity) during a specific time period

Statement of Cash Flows

reports the firm's receipt and disbursement of cash which are classified according to the company's major activities, namely: operating, investing, and financing

Seventh Step in the Accounting Cycle

Journalizing and Posting Closing Entries

What is the purpose of closing accounts?

To prepare the accounts for recording transactions for the next accounting period

What does closing the books mean?

refers to setting the balances of the income and expense accounts back to ZERO

to compute for net income/loss on a yearly basis

What is the income summary account?

Credit Balance = Net income

Debit Balance = Net loss

Indirect method of closing the book

closed to the owner's drawing account and then to the capital account

Eighth step in the Accounting Cycle

Preparing Post-Closing Trial Balance

What is the Post-closing trial balance?

lists all the real accounts' balances as of the end of the accounting period covered and would be a final check on the equality of total debits and credits of all existing accounts with balances in the general ledger

Ninth step in the Accounting Cycle

Journalizing and Posting of Reversing Entries

Reversing Entries

These are special entries recorded at the beginning of every accounting period

They reverse some of the adjusting entries made in the prior period

Is an optional step but is used for consistency and convenience