Accounting Cycle Upto Trial Balance(2)

8/3/2019 Accounting Cycle Upto Trial Balance(2)

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THE ACCOUNTING CYCLE

A DAC 501: FINANCIALACCOUNTING PRESENTATION.

BY

HERICK ONDIGO

SCHOOL OF BUSINESS, UoN


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The Accounting Cycle

The accounting cycle is the process by whichaccountants prepare financial statements for anentity for a specific period of time.


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The Accounting Cycle

For a new business, it begin by setting up ledgeraccounts.

For an established business, begin with account

balances carried over from the previous period.


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The Steps In The Accounting Cycle

1. Analyze source documents & record businesstransactions in a journal

2. Post journal entries to the ledger accounts3. Prepare unadjusted trial balance (TB)

4. Journalize and post end of periodadjustments (EOPA)5. Prepare adjusted Trial Balance6. Prepare /Create financial statements &

reports from data in adjusted TB7. Journalize and post the closing entries8. Prepare the post-closing trial balance9. Prepare and post reversing entries


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Detailed Steps in the Accounting Cycle

AnalyzeBusiness

Transactions

.

Journalizetransactions

in the

journal.

Post entries

to the

accounts in

the ledger.

Prepareunadjusted

trial

balance.

Prepare

financial

statements.

Post-closing

trial balance

Journalize and

post closing

entries

Journalize

and post

adjusting

entries

Prepare

adjusted trial

balance.


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Analysis and Recording Business Transactions

Business transaction is an economic event thatcauses a change in the financial position

Financial Position:

What the entity controls How the entity controls them (claims)


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Fundamental Accounting Equation

ASSETS = EQUITIES

ASSETS = LIABILITIES + OWNERS' EQUITY


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How do we use the Accounting equation?

Recall the Basic Accounting Equation:Assets = Liabilities + Shareholders Equity Implications:

Total Asset=Claims against the assets Therefore : If assets increase : either Liabilities and/or

Shareholders should also increase and vice versa

For example: borrow cash, cash (asset) willincrease and Liabilities will increasewhen it is paid back: cash (asset) will decrease

and liabilities will decrease


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How do we record/Account?

AnACCOUNT (ledger Account) : is anaccounting device used to record changes in aof a specific asset, liability or owners equityitem

Has 3 elements: title, debit side and credit side(also called the T-Account)

Changes in the accounts are entered manuallyinto a book called a ledger or computerizedledger

Basic forms of book ledgers: the two-columnaccount format, and the running formataccount

Chart of accounts


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Definition of Ledger Account

Ledger Account Complete listing of business transactions for an

individual accountWhere you look if you want to find the balance of any

given account General LedgerA loose-leaf book or computer file containing all the

Ledger Accounts

Each account from the chart of accounts has its own

ledger account in the general ledger Complete listing of all account tittles and account

names/codes used by an entity is called the chart ofaccounts - It is like a table of content in a book


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Forms of Ledgers

Date Item Post. Ref. * Debit Date Item

Posting

Reference Credit

Account No:Account

Left-hand or Right-hand or

Debit Side Credit Side

Account Name Account No:

Two-Column Account

T-Account form that depicts the two-column account:


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How do accounts behave?

Assets = Liabilities + Shareholders Equity

+ + +

So Assets increase on the left hand or debit side thenthey decrease on the credit side

Assets

+ -

debit credit


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Behavior of Accounts cont

Liabilities and Owners Equity accounts increaseon the credit side, decrease on the debit side

Liabilities or Owners Equity Accounts

- +

debit credit


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Transaction Analysis and The Duality Concept

Double entry system states that every transactionsaffects at least two accounts.

Therefore

If an asset account increases (decreases),because of duality concept there must be acorresponding:

1. increase(decrease) in a specific liability account

2. or a decrease(increase) in a another assetaccount

3. or an increase(decrease) in owners' equityaccount.


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Whats in a Journal Entry?

1. Date2. At least one debit entry

Debit account, use exact account title, do not indenttitles

3. At least one credit entry Credit account, use exact account title, indent titles

4. An explanation of the transaction:

Check number

Invoice number Accounts receivable customer name

Many other elements OR details as appropriate

Remember: the accountant must leave a good audit trailso that users of accounting information can understandwhat occurred with each transaction

DR=CR


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Illustration of the accounting process

1. On Jan 1 2010 Ms.Farida invested $100,000 at theinception of the business, Express Travel Agency

Event

No

Assets Liabilities Owners

Equity

1 +100.000 No change +100.000

Total 100.000 0 100.000

GENERAL JOURNAL Page 1Date Account Title and Description Acct.No. Debit Credit

1 Jan Cash 100 100.000

Capital 500 100.000

Investment by the shareholders


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2. On 1 January employed a full time secretaryand a sales representative.

Event No Assets Liabilities Owners Equity

1 +100.000 No change +100.000

2 No change No change No changeTotal 100.000 0 100.000


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3. On 1 January rented an office building and paid 3 monthsrent of $600.


1 +100.000 No change +100.000

2 No change No change No change

3 +600 No change No change

-600 No change No change

Total 100.000 0 100.000

GENERAL JOURNAL Page 1

Date Account Title and Description Acct.No. Debit Credit

1 Jan Prepaid Rent 180 600

Cash 100 600

Payment of 3 months of rent in advance


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4. On 2 January office furniture and equipment is purchased for$ 15,000 , for which $ 5,000 is paid in cash and the rest would be

paid later in January and February 2010.

Event No Assets LiabilitiesOwners Equity

1 +100.000 No change +100.000




4 +15.000 +10.000 No change

-5.000

Total 110.000 10.000 100.000


Date Account Title and Description Acct.No Debit Credit

2 Jan Furniture and Equipment 255 15.000

Cash 100 5.000

Accounts Payable 320 10000

Purchase of furniture and equipment


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5. On 3 January insured the office building and the equipmenteffective from 1 January to 31 December 2010 and paid $ 120for the whole period.


1 +100.000 No change +100.000




4 +15.000 +10.000 No change

-5.0005 +120 No change No change

-120

Total 110.000 10.000 100.000



3 Jan Prepaid Insurance 180 120

Cash 100 120

Purchase of insurance policy


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6. On 5 January the company signed an agreement withKeya Airline to sell their airline tickets and receivecommissions in return.

Event No Assets Liabilities Owners Equity1 +100.000 No change +100.000


3 +600 No change No change-600 No change No change

4 +15.000 +10.000 No change

-5.000


-120


Total 110.000 10.000 100.000


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7. On 10 January Express Travel Agency borrowed $15,000 fromthe bank at an annual interest rate of 24% for six months. Theprincipal and the interest of the loan will be paid together on 10July 2010.Event No Assets Liabilities Owners Equity

1 +100.000 No change +100.000


3 +600 No change No change-600 No change No change

4 +15.000 +10.000 No change

-5.000

5 +120 No change No change-120


7 +15.000 +15.000 No change

Total 125.000 25.000 100.000


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7. On 10 January Express Travel Agency borrowed $ 15,000 from thebank at an annual interest rate of 24% for six months. The principaland the interest of the loan will be paid together on 10 July 2010.


Date Account Title and Description Acct.No Debit Credit10 Jan Cash 100 15.000

Bank Loan 300 15.000

Borrowing from the bank


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8. On 10 January purchased office supplies for $2.500 in cash.


1 +100.000 No change +100.000



-600 No change No change4 +15.000 +10.000 No change

-5.000


-1206 No change No change No change

7 +15.000 +15.000 No change

8 +2.500 No change No change

-2.500

Total 125.000 25.000 100.000


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8. On 10 January purchased office supplies for $2,500 in cash.


Date Account Title and Description Acct.No. Debit Credit10 Jan Office Supplies 136 2.500

Cash 100 2.500

Purchase of office supplies


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9. During the first half of January the agency sold tickets to variouscustomers and on 16 January issued a commission invoice to clientsamounting to $5,000 that will be collected later in January 2010.Event No Assets Liabilities Owners Equity

1 +100.000 No change +100.000




4 +15.000 +10.000 No change

-5.000


-120

6 No change No change No change7 +15.000 +15.000 No change


-2.500

9 +5.000 No change +5.000

Total 130.000 25.000 105.000


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9. During the first half of January the agency sold tickets to variouscustomers and on 16 January issued a commission invoice to clientsamounting to $ 5,000 that will be collected later in January 2010.

Left or Debit Side Right or Credit Side

Decrease Increase

Revenue Accounts



16 Jan Accounts Receivable 120 5.000

Commission Revenue 600 5.000

Recognition of commission on ticket sales


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10. On 20 January the company paid $5,000 for the furniture andequipment that were purchased on 2 January.Event No Assets Liabilities Owners Equity

1 +100.000 No change +100.0002 No change No change No change



4 +15.000 +10.000 No change

-5.000


-120


7 +15.000 +15.000 No change8 +2.500 No change No change

-2.500

9 +5.000 No change +5.000

10 -5000 -5000 No change

Total 125.000 20.000 105.000


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10. On 20 January the company paid $5.000 for the furniture andequipment that were purchased on 2 January.


Date Account Title and Description Acct.No Debit Credit20 Jan Accounts Payable 320 5.000

Cash 100 5.000

Payment for an accounts payable


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11. On 22 January received $7,500 from a customer for organizing theaccounting conference that will be held on February 2, 2010.Event No Assets Liabilities Owners Equity

1 +100.000 No change +100.000




4 +15.000 +10.000 No change

-5.0005 +120 No change No change

-120


7 +15.000 +15.000 No change

8 +2.500 No change No change-2.500

9 +5.000 No change +5.000

10 -5.000 -5.000 No change

11 +7.500 +7.500 No change

Total 132.500 27.500 105.000


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11. On 22 January the company received $7.500 from a customer fororganizing the accounting conference that will be held on 2 February 2010.



22 Jan Cash 100 7.500

Unearned Revenues 340 7.500

Receipt of advance payment from a customer


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12. The company received the full payment of commission charged toKenya Airlines of $ 5.000 on 23 January.


1 +100.000 No change +100.000




4 +15.000 +10.000 No change-5.000


-120


7 +15.000 +15.000 No change


9 +5.000 No change +5.000

10 -5.000 -5.000 No change

11 +7.500 +7.500 No change


-5.000Total 132.500 27.500 105.000


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12. The company received the full payment of commission charged toKenya Airline s of $ 5,000 on 23 January.


Date Account Title and Description Acct.No Debit Credit23 Jan Cash 100 5.000

Accounts Receivable 120 5.000

Receipt of payment from a customer


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13. On 24 January paid salaries of $ 9,000 employees in cash.Event No Assets Liabilities Owners Equity

7 +15.000 +15.000 No change


-2.500

9 +5.000 No change +5.000

10 -5.000 -5.000 No change

11 +7.500 +7.500 No change


13 -9.000 No change -9.000

Total 123.500 27.500 96.000


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13. On 24 January paid salaries of $ 9,000 employees in cash.


Increase Decrease

Expense Accounts



24 Jan Salary Expense 770 9.000Cash 100 9.000

Payment of salaries


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14. During the second half of January the agency sold tickets to variouscustomers and on 31 January issued a commission invoice to KenyaAirline amounting to $ 7,500 which will be collected in February 2010.



-2.500

9 +5.000 No change +5.00010 -5.000 -5.000 No change

11 +7.500 +7.500 No change


-5.000

13 -9.000 No change -9.000

14 +7.500 No change +7.500

Total 131.000 27.500 103.500


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14. During the second half of January the agency sold tickets to variouscustomers and on 31 Jan sent an invoice to Kenya Airline amounting to$7,500 which will be collected in February 2010


Date Account Title and Description Acct. Debit Credit

31 Jan Accounts Receivable 120 7.500

Commission Revenues 600 7.500

Recognition of commission on ticket sales


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15. Ms. Farida ( the proprietor) withdrew $ 3,000 on 31 Januaryfor her personal use.Event No Assets Liabilities Owners Equity

7 +15.000 +15.000 No change


-2.500

9 +5.000 No change +5.00010 -5.000 -5.000 No change

11 +7.500 +7.500 No change


-5.00013 -9.000 No change -9.000

14 +7.500 No change +7.500

15 -3.000 No change -3.000

Total 128,000 27,500 100,500


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15. Ms. Farida withdrew $ 3.000 on 31 January for personal use.


Increase Decrease

Owners' Withdrawals or Dividends


Date Account Title and Description Acct.No Debit Credit

31 Jan Withdrawals XXX 3,000

Cash 100 3,000

Withdrawal by the owner


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Summary of Journalizing

Steps:1. Determine the effects of transactions on

three components of the accounting

equation,2. Determine which specific accounts are

affected, and

3. Assure that total of the increases shouldbe equal to either increases on the otherside of the equation or to decreases on thesame side, or a combination there of.


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Behavior of Accounts- Summary

Assets = Liabilities + Owners Equity+ - - + - +

Dr Cr Dr Cr Dr Cr

Expense Revenue

+ - - +Dr Cr Dr Cr

Withdrawals/Dividends+ -

Dr Cr


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Accounting Cycle-Revisited

Analyze and

record the

transactions

Post the

transactions and

prepare trialbalance

Adjust the

accounts

and prepare

trial balance

Close the

accounts and

prepare trial

balance

Prepare the

financial

statements


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Posting -Defined

The process of transferring figuresfrom the journal to the ledger accounts

It simply involves transferring data

from one accounting entry into another The purpose is to classify and

summarize transactions and events

affecting specific elements of thefinancial statements


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Four-Step Posting Process

1. Transfer transaction date to accounts date column2. Transfer the debit/credit amount and calculate the

new balance3. Write journal page number in posting reference

column of ledger as a cross-reference4. Go back to journal and write account number inposting reference column of journal as a cross-reference

Cross-reference The ledger account number in the Post. Ref. column

of the journal and the journal page number in thePost. Ref. column of the ledger account

P ti t Th L d ill t t d


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Posting to The Ledger illustratedGENERAL JOURNAL Page 1


1 Jan Cash 100 100.000Capital 500 100.000

Investment by the shareholders

LEDGER - Cash Acc. No. 100

Date Description Ref Debit Credit Debit

Balance

Credit

Balance

1 Jan Capital P 1 100,000 100,000

LEDGER - Capital Acc. No. 500

Date Description Ref Debit Credit Debit

Balance

Credit

Balance

1 Jan Cash P 1 100,000 100,000


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LEDGER - Cash Acc. No. 100

Date Description Debit Credit

1 Jan Capital 100,000

1 Jan Office rent 600

2 Jan Office furniture and equipment 5,0003 Jan insurance expense 120

10 Jan Bank loan 15,000

10 Jan Office supplies 2,500

20 Jan Accounts payable 5,00022 Jan Unearned Revenue 7,500

23 Jan Acccounts Recievable 5,000

24 Jan salaries expense 9,000

31 Jan Withdrawal 3,000

Posting illustrated


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Exercise

Post all the above transactions (journal entries)to the following ledger accounts: Prepaid Rent, Office supplies, Prepaid insurance, Office

Furniture & Equipment, Bank loan, Accounts Payable,Unearned Revenue, Capital, Withdrawals, CommissionRevenue, & Salary Expense

Cast the ledger accounts

Determine the balances carried down (Bal c/d)and balances brought down (b/d)

Prepare a summary of the ledger balances in a two

columnar listing to derive the Trial Balance( TB)


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Category of the Account Increase RecordedBy

Normal Balance

Assets Debits Debit

Liabilities Credits CreditShareholders Equity

Capital Credits Credit

Dividends or Withdrawals Debits Debit

Revenues Credits Credit

Expenses Debits Debit

SUMMARY -Normal Balances of Accounts


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Preparing a Trial Balance

List the ledger account balancesin two columns on the trial

balanceLeft column = Debits

Right column = CreditsTrial balance proves DR = CR

The Balancing of Accounts, The Trial Balance &


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g ,

Financial statements

Introduction:

In the previous exercise , you have learned the principlesof double entry and how to post to the ledger accounts. Thenext step in our progress towards the financial statements isthe trial balance.

Before transferring the relevant balances at the year end to thefinancial statements, it is usual to test the accuracy of thedouble entry bookkeeping records by preparing a trial balance.This is done by taking all the balances on every account. Dueto the nature of double entry, the total of the debit balances

will be exactly equal to the total of the credit balances.

The Balancing of Accounts & The Trial Balance


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Question:Once you have closed all the accounts, what would

do? Answer: Prepare a Trial Balance

Question: What is a Trial Balance then? What is it for? Howdoes it look like?

Answer: A Trial Balance is a list of nominal ledger accountand their balances at a given date. It is usuallyprepared on the last day of the accounting period.It consists of a Debit and a Credit balance.

Its purposes:

(1) It is prepared to check that the total of debit balances is thesame as the total of credit balances and offer reassurance that thedouble entry recording from day books has been done correctly.

(2) For preparation of statement of income and the statement offinancial position

Th B l i f A t & Th T i l B l


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The rules to prepare the Trial Balance:

Total Debit Entries = Total Credit Entries

Debit Credit

Assets

Expenses

Drawings

Income/ Revenue

Liabilities

Capital


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Steps to preparing the Trial Balance:

1) Balance/cast ALL the ledger accounts in the books.

2) List all the Debit balances on the debit side and add them up.

3) List all the Credit balances on the credit side and add them up.

4) Ideally the trial balance should balance after step 3


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What if the trial balance shows unequal debit and creditbalances?

If the columns of the trial balance are not equal, there must bean error in recording or processing the transactions.

4 Errors revealed by the trial balance:

The errors revealed are those errors which cause the TrialBalance totals to disagree. (i.e do not balance)

There are FOUR types of errors revealed by a trial balance:

1) Posting to the wrong side of an account.

2) Errors in calculation and balancing

3) Incorrect amounts entered on one entry

4) Omission of one entry.



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Question: How do we locate all of the above errors?

Answers: 1) Check day-book (journal) totals

2) Check additions of Ledger accounts, ensureeach balance is correct

3) Check all ledger account balances have beenrecorded in the Trial Balance.

4) Check all balances have been entered in the

Trial Balance on the correct side.5) Check additions have been done correctly



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The Balancing of Accounts,& The Trial Balance

Question: Once you are sure there is no mistake made in theTrial Balance, what do you do in the next step?

Answers: Prepare End of Period Adjustment & then preparethe following statements:

1) Statement of Income

2) Statement of Financial Position

In short, these are the steps:

1) Trial Balance

2) End of Period Adjustments

3) Statement of Income

4) Statement of Financial position

Th B l i f A & Th T i l B l


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However, a trial balance will not disclose the following typesof errors: (Errors not revealed by the trial balance)

1) Errors of omission

Complete omission of a transaction, because neither a

debit nor a credit is made.

2) Errors of commission

This happens when original figure incorrectly

entered. (Correct double entries but incorrect amountswere recorded)


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3) Compensating errorsThis happens where errors cancel out each other. (eg anerror of 100 is exactly cancelled by another 100 errorelsewhere).

4) Errors of principles

This happens when the wrong type of account had beenused (eg the purchase of a motor van is debited to aexpense account, such as motor expenses, rather than afixed asset account)

5) Complete reversal of entriesThis happens when an account should be debited but wascredited (and vice versa)

Th T i l B l


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The Trial Balance

Accounts Debit Credit

Cash 102,280

Accounts Receivable 7,500

Office Supplies 2,500Prepaid Rent 600

Prepaid Insurance 120

Office Furniture and Equipment 15,000

Bank Loan 15,000

Accounts Payable 5,000

Unearned Revenues 7,500Capital 100,000

Withdrawal 3,000

Commission Revenues 12,500

Salary Expenses 9,000

Total 140,000 140,000

Express Travel Agency

Trial Balance

31-Jan-10

in $


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THE END

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Accounting Cycle Upto Trial Balance(2)

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