Accounting Cycle, Double-Entry, and Adjusting Entries — Quick Reference

The Accounting Equation

• Fundamental relation: $A = L + ext{Shareholders' Equity}$

• Debits increase assets and expenses; Credits increase liabilities, equity, and revenues.

The Double-Entry System

• Every transaction has at least one debit and one credit; total debits = total credits.

• Example: Dr. Supplies $1000$; Cr. Cash $1000$.

T-Accounts

• Structure: Account title at the top; two sides for recording changes.

• Debit side is on the left; Credit side on the right.

• Purpose: to illustrate how individual accounts are affected by transactions.

Types of Accounts

• Major categories: Asset, Liability, Shareholders’ Equity, Income (Revenue), Expense.

• Permanent vs Temporary:

  • Permanent: Asset, Liability, and Equity accounts (carry balances forward).

  • Temporary: Revenue, Expense, and Dividends (closed to retained earnings).

• Contra Accounts:

  • Definition: Contrasts the parent account (offsets value).

  • Examples: Accumulated depreciation, Sales returns, Early payment discounts.

The Accounting Cycle

• Step 1: Obtain information from external source documents.

• Step 2: Analyze the transaction.

• Step 3: Record in a journal.

• Step 4: Post from the journal to the general ledger.

• Step 5: Prepare an unadjusted trial balance.

• Step 6: Record adjusting entries and post to the ledger.

• Step 7: Prepare an adjusted trial balance.

• Step 8: Prepare financial statements.

• Step 9: Close temporary accounts to retained earnings.

• Step 10: Prepare a post-closing trial balance.

The Trial Balance Concepts

• Unadjusted Trial Balance:

  • List of all general ledger accounts with their balances.

  • Purpose: check completeness and that the accounting equation balances.

  • Does not guarantee correctness of balances; may miss errors.

  • Totals: $ext{Total Debits} = ext{Total Credits}$

• Adjusted Trial Balance: prepared after adjusting entries.

• Post-Closing Trial Balance: verifies closing entries were posted correctly.

Adjusting Entries

• Purpose: implement accrual accounting; recognize revenues when earned and expenses when incurred.

• Types:

  • Prepayments/Deferrals

  • Accruals

  • Estimates

Prepayments / Deferrals

• Definition:

  • Prepayments: cash paid before the related performance obligation is fulfilled (prepaid expense; asset).

  • Deferrals: cash received before revenue is earned (deferred revenue; liability).

• End-of-period adjustments ensure expense/revenue match the period and comply with revenue recognition.

• Examples:

  • Prepaid Rent (expense recognition):

  • At payment: $ext{Dr Prepaid Rent} = 1000; ext{Cr Cash} = 1000$

  • Period-end: $ext{Dr Rent Expense} = 1000; ext{Cr Prepaid Rent} = 1000$

  • Deferred Revenue:

  • At receipt: $ext{Dr Cash} = 1000; ext{Cr Deferred Revenue} = 1000$

  • Period-end: $ext{Dr Deferred Revenue} = 1000; ext{Cr Revenue} = 1000$

Accruals

• Definition:

  • Accrued Expenses: incurred but not yet paid (liability).

  • Accrued Revenues: earned but not yet billed/collected (asset).

• Examples:

  • Salary expense incurred: $ext{Dr Salary Expense} = 10000; ext{Cr Salary Payable} = 10000$

  • Services performed but not billed: $ext{Dr Accounts Receivable} = 10000; ext{Cr Revenue} = 10000$

Estimates

• Depreciation: requires estimates of useful life and residual value.

• Bad debt expense: estimate of uncollectible receivables.

What happens without adjusting entries

• Unearned revenues would be understated? No; revenues understated and liabilities overstated.

• Prepaid expenses would be understated? No; expenses understated and assets overstated.

• Accrued revenues would be understated? Yes; revenues and assets understated.

• Accrued expenses would be understated? Yes; expenses and liabilities understated.

Preparing Financial Statements

• Income Statement (and, where applicable, Statement of Comprehensive Income)

• Balance Sheet (Statement of Financial Position per IFRS)

• Statement of Shareholders’ Equity

• Statement of Cash Flows

Income Statement and OCI

• Income Statement reports: revenues minus expenses, yielding net income for the period.

• Statement of Comprehensive Income includes OCI items not in net income.

• OCI examples: fair value gains/losses on available-for-sale or cash flow hedges.

Balance Sheet

• Shows financial position at a point in time.

• Classified into current vs non-current assets and liabilities.

Statement of Cash Flows

• Categorizes cash movements into:

  • Operating activities

  • Investing activities

  • Financing activities

Closing and Post-Closing (End of Year)

• Closing: transfer temporary account balances (revenues, expenses, dividends) to Retained Earnings.

• Post-Closing Trial Balance: verifies closing entries are complete and correct.

Quick Reference: In-class exercise (summary)

• In-class exercise demonstrates recording journal entries for a small set of transactions and posting to ledgers.

• Key takeaway: ensure debits equal credits and that adjusting entries reflect accrual accounting before financial statements.