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Accounting Cycle I

Accounting Cycle I. Lecture Outline. Introduction to the Accounting Cycle How to Prepare General Journal Entries Lecture Illustration I Periodic Vs Perpetual Inventory System Lecture Illustration II Posting Journal Entries to the Ledger Preparing an Unadjusted Trial Balance.

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Accounting Cycle I

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  1. Accounting Cycle I

  2. Lecture Outline • Introduction to the Accounting Cycle • How to Prepare General Journal Entries • Lecture Illustration I • Periodic Vs Perpetual Inventory System • Lecture Illustration II • Posting Journal Entries to the Ledger • Preparing an Unadjusted Trial Balance

  3. The Accounting Cycle

  4. Purpose of Accounting Cycle • The sole purpose of the accounting cycle is to enable the preparation of financial statements. • These statements are used by external users: • Investors • Lenders • Suppliers

  5. General Journal • Is the first record of business transactions in date order. Date Detail Dr Cr

  6. General ledger • The general journal entries are transferred “posted” into the general ledger. • The general ledger keeps a record of each transaction by account. Date Detail Dr Cr Bal Dr/Cr

  7. Preparing Journal Entries 3 Steps Step One • Which accounts are being affected? • Accounts are “common” categories of A, L, E, & R of the organisation. • There will always be at least two accounts affected. Step Two • Are the accounts increasing or decreasing? • ie Is the amount of cash we have on hand increasing or decreasing after the transaction.

  8. Preparing Journal Entries 3 Steps Step Three • Apply the Debit/Credit Rule and make the journal entry. • Remember the Balance sheet equation: A = L + O and the profit & loss equation: P = R – E These can be combined to give the accounting equation: A + E = R + L + O

  9. Debit/Credit Rules DEBIT NATURE: DEBIT 1. Assets 2. Expenses CREDIT NATURE: CREDIT 1. Liabilities 2. Owners Equity 3. Revenue

  10. Debit or Credit Nature?? Debit Nature Credit Nature A + E = R + L + O

  11. Debit or Credit Nature?? A.L.O.R.E Credit Nature

  12. Example 1 • On 28th April Wiggles Ltd. purchased $1,000 worth of inventory on credit. • What is the journal entry required to record this transaction??

  13. Solution 1 Step One: Accounts Affected?? • The two accounts being affected are the inventory account and accounts payableaccount (ie we purchased inventory on credit and therefore we owe our supplier money).

  14. Solution 1 Step Two: Accounts Increasing or Decreasing • Do we have more or less inventory following this transaction?? • More • Do we owe more or less money following this transaction?? • More

  15. Solution 1 Step Three • Inventory is an asset, which has a debit nature. It is increasing therefore we will debit inventory in the general journal. • Accounts payable is a liability. Liabilities have a credit nature. Accounts payable is increasing therefore we must credit this account in the general journal.

  16. General Journal Debit Credit Inventory 1,000 Accounts Payable 1,000 (Inventory acquired on credit) • It is standard practice to put the debit entry first.

  17. Example 2 • On the 2nd May Wiggles Ltd. paid the $1,000 they owe to their supplier. • What is the journal entry required to record this transaction?

  18. Solution 2 Step One: Accounts Affected?? • The two accounts being affected are the cash account and accounts payable account. Hint • Whenever the words “paid” or “received” are used you know the cash account is being affected.

  19. Solution 2 Step Two: Accounts Increasing or Decreasing • Do we have more or less cash following this transaction?? • Less • Do we owe more or less money following this transaction?? • Less

  20. Solution 2 Step Three • Cash is an asset, which has a debit nature. It is decreasing therefore we will credit cash in the general journal. • Accounts payable is a liability. Liabilities have a credit nature. Accounts payable is decreasing therefore we must debit this account in the general journal.

  21. General Journal Debit Credit Accounts Payable 1,000 Cash 1,000 (Payment to Supplier) • A narration simply explains what the journal entry is about. Narrations will not be required in this course.

  22. Preparing Journal Entries The Key to Preparing Journal Entries • Be logical • Be methodical (ie account for one part of the transaction at a time. Don’t try to do everything at once.)

  23. Periodic Inventory System • The amount of inventory on hand is known only twice: • The beginning of the period • The end of the period (following a stocktake) • The inventory account is not updated after each sale.

  24. Perpetual Inventory System • The amount of inventory on hand is known at all times. • The inventory account is updated ‘perpetually’ (ie after each new sale). • The perpetual system has become the dominant inventory system due to the “computerisation” of business.

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