Ibrahim Sameer (MBA - Specialized in Finance, B.Com – Specialized in Accounting & Marketing)
Accounting Cycle The accounting cycle, also commonly referred to
as accounting process, is a series of procedures in the
collection, processing, and communication of
financial information.
Accounting involves recording, classifying,
summarizing, and interpreting phases.
Accounting Cycle Source Document
Transactions Analysis
Journalizing
Posting to ledgers
Preparation of unadjusted Trial Balance
Adjusting Entries
Preparation of Adjusting Trial Balance
Preparation of Financial Statements
Closing Entries
Source Documents Source documents are documents that provide proof
that a transaction had actually occurred, and this is the
basis of accounting records. Controls on source
document are important to ensure accounting
information is accurate and reliable.
Source Documents Examples of source document are sales invoice,
purchase invoice, debit note, credit notes, cheque and
receipts.
During an audit, source documents are used as
evidence that a particular business transaction
occurred.
Transactions Analysis Transactions are analysed; how each transaction
affects the accounting equation is looked into. At this
stage the accounts affected by the transaction and how
it is affected (increased or decreased) will be
identified.
Transactions Analysis For example, a loan made by the owner in his name
that does not have anything to do with the entity is not
accounted for.
The transactions identified are then analyzed to
determine the accounts affected and the amounts to
be recorded.
Journalizing A journal is a book – paper or electronic – in which
transactions are recorded. Business transactions are
recorded using the double-entry bookkeeping system.
They are recorded in journal entries containing at
least two accounts (one debited and one credited).
Journalizing To simplify the recording process, special journals are
often used for transactions that recur frequently such
as sales, purchases, cash receipts, and cash
disbursements. A general journal is used to record
those that cannot be entered in the special books.
Journalizing Transactions are recorded in chronological order and
as they occur. Hence, journals are also known as Books
of Original Entry.
Posting Records from the journal are then posted (transferred)
to ledgers. Posting should be done on timely basis, to
ensure ledger is up to date.
Posting For example, all journal entries made to Cash would be
transferred into the Cash account in the ledger.
Increases and decreases in cash will be entered into
one ledger account. Thus, the ending balance of Cash
can be determined.
Preparation of Unadjusted Trial Balance
A trial balance is prepared to test the equality of the
debits and credits. All account balances are extracted
from the ledger and arranged in one report.
Afterwards, all debit balances are added. All credit
balances are also added. Total debits should be equal
to total credits.
Preparation of Unadjusted Trial Balance
Some errors could exist even if debits are equal to
credits, such as double posting or failure to record a
transaction.
Adjusting Entries Adjusting entries are prepared as an application of
the accrual basis of accounting. At the end of the
accounting period, some expenses may have been
incurred but not yet recorded in the journals. Some
income may have been earned but not entered in the
books.
Adjusting Entries Adjusting entries are prepared to have the accounts
updated before they are summarized into the financial
statements.
Adjusting entries are made for accrual of income,
accrual of expenses, deferrals(income method or
liability method), prepayments (asset method or
expense method), depreciation, and allowances.
Preparation of Adjusted Trail Balance
An adjusted trial balance may be prepared after
adjusting entries are made and before the financial
statements are prepared. This is to test if the debits are
equal to credits after adjusting entries are made.
Preparation of Financial Statement
When the accounts are already up-to-date and equality
between the debits and credits have been tested, the
financial statements can now be prepared. The
financial statements are the end-products of an
accounting system.
Preparation of Financial Statement
A complete set of financial statements is made up of:
(1) Income Statement
(2) Statement of Changes in Equity
(3) Statement of Financial Position or Balance Sheet
(4) Statement of Cash Flows
(5) Notes to Financial Statements.
Closing Entries At the end of an accounting period, all temporary
accounts are closed. Revenues and expenses are closed
to income summary. Profit or loss is then transferred
to capital account. Drawings are also closed to capital
account too.
Accounting Equation You need to understand that all economic events
(transaction) can be classified into three categories:
Owner’s equity
Liabilities
Assets
Assets Assets are resources that are owned by the entity.
Land, properties, equipment, motor vehicle, cash,
receivables (debtors) are examples of assets. These
assets are expected to provide future economic
benefits to the entity.
Liabilities Liabilities are debts or obligation of the entity.
Loans, bank overdrafts and payables (creditors) are
examples of liabilities. The liabilities are expected to
be cleared off by sacrificing the entity’s assets.
Owner’s Equity Owner’s equity is the residual claim (rights) of entity
assets.
Owner’s Equity There are four items that can affect the owner’s equity,
and they are:
Capital investments: they will increase owners’ equity.
Drawings: they will decrease owners’ equity
Revenues: they will increase the owners’ equity.
Expenses: they will decrease the owners’ equity.
Owner’s Equity Hence the equations can be rewritten as:
Transaction Analysis The following are the steps that you can use to help
you analyse business transactions.
STEP 1: Read and think about the transaction
STEP 2: Identify components in the equations that are
affected. Is it Asset, Liability or Owner’s Equity?
Transaction Analysis STEP 3: Identify the accounts and the effects.
Decreased? Increased?
STEP 4: Check the equation; it has to be balanced.
Transaction Analysis - Example Sonic invested RM50,000 cash to start a photography
business. (1 Sep 2013)
Sonic purchased a photo processing machine costing
RM1,000 cash. (3 Sep 2013)
Sonic withdrew RM10,000 cash for personal use. (4
Sep 2013)
Transaction Analysis - Example
Transaction Analysis - Example
Transaction Analysis - Example
Q & A