Accounting Cycle for the Service Business—Cash Basis

  • Accounting cycle involves analyzing, classifying, recording, summarizing, and interpreting business transactions.

  • It includes maintaining running totals (balances) for accounts like cash, utilities, debts, income, and equipment costs.

Categories of Accounts:

  • Assets: Business's valuable possessions.

  • Liabilities: Business's debts to outsiders.

  • Stockholders’ equity: Owners' stake in the business.

  • Revenue: Income from business operations.

  • Expenses: Costs of earning revenue.

Chart of Accounts

  • Lists all accounts used, ordered by category.

Net Income

  • Revenue - Expenses = Net Income (or Net Loss if expenses exceed revenue).

The Mechanics of Accounting
The Journal

  • Records transactions chronologically with debits (left) and credits (right).

Rules of Debit and Credit

  • Debit increases cash and expenses; credit increases revenue and decreases cash.

Journalizing Transactions

  1. Select affected accounts.

  2. Determine dollar amounts.

  3. Apply debit/credit rules.

  4. Record date, debit account (amount), and indented credit account (amount).

Ledger

  • Lists individual accounts with running balances.

Posting

  • Transferring journal entries to the ledger.

Normal Balance

  • Balances accumulate in either debit or credit column; total debits must equal total credits.

Trial Balance

  • Lists accounts and balances to check if total debits equal total credits.

Financial Statements

  • Regular reports over consistent periods.

Income Statement

  • Summarizes revenue, expenses, and net income/loss.

The Accounting Cycle

  • Repetitive accounting procedures.

Temporary Accounts

  • Used for specific period transactions, balances reset to zero.

Closing Entries

  • Reset income statement account balances to zero and transfer profit to Retained Earnings.

Revenue/Expense on Account

  • Accounts Receivable tracks customer debt; Accounts Payable tracks business debt to vendors.

Asset, Liability and Stockholders’ Equity Accounts

  • Reported on the balance sheet as permanent accounts.

Assets

  • Business possessions recorded at cost; includes current (Cash, A/R) and fixed assets (Land, Building).

Liabilities

  • Business debts; includes Accounts Payable and Notes Payable.

Stockholders' Equity

  • Owners’ share; includes Common Stock, Retained Earnings, Cash Dividends.

The Accounting Equation

  • Assets = Liabilities + Stockholders’ Equity.

Accounting Equation Breakdown

  • Common Stock + Retained Earnings = Total stockholders’ equity

Retained Earnings Statement

  • Shows changes in Retained Earnings.

Balance Sheet

  • Summarizes financial position at a specific date.

Changes in Stockholders’ Equity

  • Changes to Common Stock, Retained Earnings, or Cash Dividends affect total equity.

Contra Accounts

  • Opposite normal balance for tracking changes while reporting original amounts.

The basic accounting cycle

  1. Journalize transactions

  2. Post to ledgers

  3. Income statement

  4. Retained earnings statement

  5. Balance sheet

  6. Journalize closing entries

  7. Post closing entries to ledgers