AC 2 - Accounting Cycle Notes

What is the definition of a cycle in accounting?

A cycle has a starting point, events occur, and ends at the starting point, repeating itself.

What is the first step in the accounting cycle?

Transaction: An exchange involving monetary value occurs.

What is a transaction?

An event where a business exchanges goods/services for money.

What are source documents?

Proof of transactions, like receipts or cheques, that must be recorded.

What is the purpose of source documents?

To provide proof that transactions have taken place.

What are the books of first entry?

The Cash Receipts Journal (CRJ) and Cash Payments Journal (CPJ).

What is the function of the ledger?

To list all accounts of a business after posting from journals.

What is recorded in the Cash Receipts Journal (CRJ)?

All money received by the business.

What is recorded in the Cash Payments Journal (CPJ)?

All money paid out of the business.

What must happen to journals at the end of the month?

They must be closed off and posted to the general ledger.

What is included in the income statement?

Summary of revenues and expenses over a period.

What does the balance sheet represent?

A snapshot of a business's assets, liabilities, and equity at a specific time.

What is a General Ledger?

A record of all accounts for a business, using T accounts format.

What are the sides of a T account?

Left side: Debit. Right side: Credit

What is the double entry system?

Each debit entry must have a matching credit entry in a different account.

What is the purpose of a Trial Balance?

To verify that total debits equal total credits after posting to the General Ledger.

What does a Trial Balance list?

All account balances from the double entry system, with debit and credit sides.

What happens if a Trial Balance does not balance?

It indicates that errors have occurred in the accounting entries.

What are the financial statements prepared at year end?

Income Statement, Balance Sheet

What does an Income Statement show?

The profit or loss of a business over a specific period.

How does profit affect owner's equity?

Profit increases owner's equity, while loss decreases it.

What is reflected in a Balance Sheet?

The financial position of a business, including assets, liabilities, and owner's equity.

What must total assets equal in a Balance Sheet?

Total assets (A) must equal owner's equity (OE) plus liabilities (L) (A = OE + L).

What is the formula for owner's equity at year end?

Capital balance at start + contributions + profit (or minus loss) minus drawings.