ACCT101 The Accounting Cycle

List the steps of the accounting cycle

1) Use source documents to identify accounts affected by external transactions

2) Analyse impact on the accounting equation, determine which accounts to Dr/Cr, record transaction in journal

3) Post to General Ledger

4) Prepare trial balance

5) Make adjusting entries

6) Closing entries

Examples of source documents

invoice, bills, contracts

FOB Shipping Point

Date goods shipped from seller, buyer pays

FOB Destination

Date goods delivered to buyer, seller pays

What happens in a purchase order?

No asset created, no liability incurred

Normal balance

The side that makes the accounting element increase

Order of elements in a Trial Balance

A → L → OE → RE → D → R → E

Revenue recognition

record when goods/services provided

Expense recognition

costs incurred to help achieve revenues in period

Examples for expense recognition

admin staff salaries, office electricity bills

Deferral

Cash moves before event occurs

Accrual

Cash moves after event occurs

Separate liabilities (cannot use AP)

Salaries payable

Interest payable

Utilities payable

Dividends payable

Income tax payable

Accounts to adjust

Accrued revenue

Prepaid expense

Accumulated depreciation + depreciation expense

Accrued expense

Unearned revenue

Accrued revenue

I provided service, they haven’t paid

Prepaid expense

Paid prior, consumed benefit in current period

Accumulated depreciation + depreciation expense

Consumed benefits from long-term PPE

Accrued expense

Expense incurred, I haven’t paid

Unearned revenue

They paid, I haven’t provided service

What to do when closing entries?

All D, RE, E in Trial Balance to be oppositely Dr/Cr-ed, to match total RE