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Accounting Cycle

Accounting Cycle. Accounting Concepts. Business-entity - A business should be a separate entity from the owner of a business Personal items Records and transactions. Accounting Concepts. Continuing-concern concept – the business will continue to operate.

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Accounting Cycle

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  1. Accounting Cycle

  2. Accounting Concepts • Business-entity - A business should be a separate entity from the owner of a business • Personal items • Records and transactions

  3. Accounting Concepts • Continuing-concern concept – the business will continue to operate. • Allows assets to be recorded at cost • Remain at that figure no matter what the market value may be • If sold, the assets of the company will be valued at market value to determine selling price

  4. Accounting Concepts • Time-period concept – divides the business into equal periods of time, • ie month, quarter or year

  5. Accounting Concepts • Cost principle – assets are carried at cost on the financial statements • Cost is what was paid for the asset • An item from your home - used value

  6. Accounting Concepts • Matching principle – earnings and expenses are recorded in the period when one benefits the other • ie September expenses are recorded in the same period as September revenue

  7. Accounting Concepts • Consistency Principle – Methods and procedures are kept the same over time. • Allows for better comparison of data • If changed, change and effect must be reported on Financial Statements

  8. Steps in the Accounting Cycle Adjusting Entries – Unpaid and/or unrecorded transactions at the end of the accounting period.

  9. Steps in the Accounting Cycle Balance Sheet - A “snapshot” of the business’ Assets, Liabilities and Owner’s Equity on a specific date.

  10. Steps in the Accounting Cycle Closing Entries – entries made to close (zero out) all temporary accounts at the end of the accounting period.

  11. Steps in the Accounting Cycle • Income Statement - profit or loss of a business • Earnings less expenses • reflects a period of time (usually one month)

  12. Steps in the Accounting Cycle Journal– the book of original entry all transactions are recorded here first

  13. Steps in the Accounting Cycle Transactions– business papers and source documents that change the financial position of a business

  14. Steps in the Accounting Cycle Book of Original Entry • Step 1 Business Transactions occur • Source Documents (receipts, invoices, tapes, checks and memorandums)

  15. Steps in the Accounting Cycle Book of Original Entry • Step 2 Analyze and Record the Transactions • Information is placed in the Journal by date of occurance

  16. Steps in the Accounting Cycle Book of Original Entry • Step 5 Journalize Adjusting Entries • No source documents • End of fiscal period • To match revenue with expenses in that period

  17. Steps in the Accounting Cycle Book of Original Entry • Step 6 Post Adjustment from Journal to Ledger • General Leger only

  18. Steps in the Accounting Cycle Book of Original Entry • Step 7 Prepare Adjusted Trial Balance • To determine if an error in posting has occurred before Financial Statements are prepared

  19. Steps in the Accounting Cycle Book of Original Entry • Step 8 Journalize Closing Entries • Close all temporary( NOMINAL) accounts • Revenue • Expenses • Drawing

  20. Steps in the Accounting Cycle Book of Original Entry • Step 9 Post Closing Entries from the Journal to the Ledger • General Ledger only

  21. Steps in the Accounting Cycle Book of Original Entry • Step 10 Post Closing Trial Balance • Permanent accounts only

  22. Steps in the Accounting Cycle Book of Original Entry • Step 11 Prepare the Financial Statements • Basic Statements • Income Statement • Balance Sheet

  23. Temporary and Permanent Accounts Permanent Accounts Assets Liabilities Capital Temporary Accounts Revenue Expenses Drawing

  24. Cash or Accrual Accounting

  25. Record Revenue (earnings) and expenses • Cash basis • Cash in Cash out • Accrual basis • Record Revenue & Expenses when earned/incurred • Cash is not the same as revenue • Matching principle

  26. Tax Form – Schedule C • 1st question asked: • Cash • Accrual • Other

  27. Cash Basis • Small businesses • Simple to understand • Record cash only when received • Record expenses when cash is paid or check is issued • Record credit card charges when signed for • Combination • Income and expense clearly shown • Consistently • Can not switch between the two

  28. Accrual Basis • Always use when merchandise is a factor • Production • Purchase • Sale • More difficult to understand • Timing of revenue and expenses • Nothing to do with payments or receipts

  29. All Revenue Only Cash Not Paid

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