Topic 4

Accounting Cycle
Accounting cycle = accounting process that begins with analyzing and journalizing
transactions and ends with the post-closing trial balance

Fiscal year = the annual accounting period adopted by a business

Fiscal years begin with the first day of the month selected and end on the last day of the
following twelfth month

Natural business year = period of 12 consecutive months ending at a low point of an

organization's activities.

Nature of the Adjusting Process

adjusting process = the analysis and updating of accounts at the end of the period before the
financial statements are prepared.
adjusting entries = The journal entries that bring the accounts up to date at the end of the
accounting period are called
accrual basis of accounting = revenues are reported on the statement of profit or loss and
other comprehensive income in the period in which they are earned.
cash basis of accounting = revenues and expenses are reported on the statement of profit or
loss and other comprehensive income in the period in which cash is received or paid.

Current assets Property, Plant, Current Liabilities Permanent

Equipment Accounts
/ Fixed Assets / Real Account
/ Plant Assets
o Cash o Equipment o Accounts payable Balance account
o Accounts o Machinery o Notes payable carried forward
receivable o Building o Wages payable
o Notes receivable o Interest payable
o Supplies o Unearned fees
o Other prepaid
expenses
 Types of Accounts Requiring Adjustment
Prepaid expenses Unearned revenues Accrued revenues Accrued expenses Depreciation Expense

advance payment advance receipt of unrecorded revenues unrecorded expenses Fixed assets
of future expenses future revenues and that have been earned that have been depreciate as they are
and are recorded as are recorded as and for which cash incurred and for used or consumed in
assets when cash liabilities when cash has yet to be which cash has yet to the business
is paid. is received. received. be paid operations.
-service performed -wages/salaries -depreciation
equipment/buildings
Transaction Transaction Transactions Transaction
-cash is paid in -cash is received for -revenue has been -an expense has been
advance for an unearned revenue. earned but has not incurred but has not
expense been recorded. been recorded.

Expense=Debit Cash=Debit No impact since the No impact since the

Cash=Credit Unearned revenue has not been expense has not been
revenue=Credit recorded. recorded.

Adjustment Adjustment Adjustment Adjustment Expense Dr.

-an end of period -an end of period -an end of period -an end of period Contra Assets Cr.
adjustment is adjustment is needed adjustment is needed adjustment is needed
needed to update to update the to recognize accrued to recognize the
the prepaid unearned revenue revenue. accrued expense.
expense account account.

Assets (turun) Cr. Liabilities (turun) Dr. Assets AR (naik) Dr. Liabilities (naik) Cr.
Owner equity Owner equity (naik) Owner equity (naik) Owner equity (naik)
(naik) Dr. Cr. Cr. Dr.

Expense = Revenue=understated Revenue=understated Expense=understated Expense=understated

understated
Net Net Net Net
Revenue Net income=understated income=understated income=overstated income=overstated
income =
overstated Liabilities=overstated Assets=understated Liabilities=understated Assets=overstated

Assets = overstated Owner Owner Owner Owner

Equity=understated Equity=understated equity=overstated equity=overstated
Liabilities = no
change
Owner equity =
overstated
Methods
1.Straigh Line
Cost-Value
Estimated useful life
2.Reducing Balance