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DAY 2 The Accounting Cycle

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10 views16 pages

DAY 2 The Accounting Cycle

Uploaded by

Mor Bank
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Accounting Transactions

• Any events that affects the accounting


equation is called a transaction.
• It may be
Sales
Purchase
Payment
Collection etc…
• If they satisfy the recognition criteria
transactions are recorded on the ledger
of the company.
Rules of Debit and Credit
• Double entry, a fundamental concept
underlying present-day bookkeeping and
accounting, states that every financial
transaction has equal and opposite
effects in at least two different accounts.
• In the double-entry system, transactions
are recorded in terms
of debits and credits.
• Debit and credits are accounting tools
used to record transactions
systematically.
Rules of Debits and Credits
Normal
balance
Credit
Debit liability
Asset Equity
Expense Revenue
Loss Other
dividend incomes
withdrawal Gains
The Accounting Cycle
• Identification
• Journalizing
• Posting
• Trial balance
• Adjustments
• Adjusted trial balance
• Work sheet
• Financial statements
• Closing entry
Journalizing
• When a business transaction takes
place, source documents will be
obtained and recorded.
• The accounting record in which a
transaction is initially recorded is known
as a journal.
• The journal is therefore referred to as
“the book of original entry”. The
process of recording a business
transaction in the accounting record is
called journalizing.
Journalizing
• In recording a business transaction
answer the following questions based
on the transaction to be recorded
may help you.
Which accounts are affected?
Is each account increased or
decreased?
Which account is debited and
which is credited?
Prepare the complete journal entry.
Case 2
• January 1. Ato Yimer took Birr 450,000 from his
personal savings and deposited it in the name of Bati
Transport.
• January 2. Bati Transport purchased two used trucks
for Birr 150,000 each, on cash.
• January 4. Bati Transport received a check for Birr 650
for services given to Alem Trading.
• January 16. Ato Yimer issued a check for Birr 9,400 to
the workers as a salary for two weeks.
• January 21. Bati Transport purchased stationary
materials and other supplies of Birr 740 on account.
• January 22. Office equipment of Birr 11,600 is bought
on account.
• January 27. The owner withdrew Birr 500 in cash for
personal use.
Posting
• After the information about a business
transaction has been journalized, that
information is transferred to the specific
accounts affected by each transaction.
This process of transferring the
information is called posting.
Trial Balance
• After the posting phase is completed, we
have to verify the equality of the debit
and credit balances. This is done
through the use of the ‘Trial Balance’. A
trial balance is a two column listing of
the accounts in the ledger and their
balance to make sure that the total of
debit balances equals the total of credit
balances.
Adjustments
• At the end of the period the balances in
accounts such as supplies and prepaid
insurance must be brought up to date.
Items require
adjustment

Deferrals Accruals
Deferrals

Deferrals

Prepaid Unearned
Expenses revenues
Accruals

Accruals

Accrued Accrued
Revenue Expense
Case 3
• Classify the following items as (1) prepaid
expense, (2) unearned revenue, (3) accrued
revenue, or (4) accrued expense.
a. Cash received for services not yet rendered
b. Salaries owed but not yet paid
c. Insurance paid
e. Rent revenue earned but not received
f. Rent expense owed but not yet paid
g. Fees earned but not received
h. Supplies on hand
i. Cash received for use of land next month
Financial Statements
• The outputs of the accounting
process.
1. Statements of comprehensive
income
2. Statement of changes in equity
3. Statement of financial position
4. Statement of cash flow

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