1.

Journal Entries (during accounting cycle)

Journal entries are a fundamental aspect of the accounting cycle. They are the first step in recording
financial transactions and ensuring that a business's financial records are accurate and up-to-date.
Journal entries are recorded in a general journal, which includes the date, account names, and the
amount of the transaction.

The journal entry includes at least two accounts - a debit and a credit - with the total debits equaling the
total credits. The debit entry is recorded on the left side of the journal entry, while the credit entry is
recorded on the right side.

Journal entries are typically recorded on a daily basis as transactions occur. They serve as a primary
source of documentation for a business's financial transactions and are used to prepare financial
statements such as the income statement and balance sheet.

The use of proper accounting principles and practices is crucial when recording journal entries. The
entries must be accurate, complete, and properly classified to ensure that the financial statements
accurately reflect the financial position of the business. Additionally, journal entries must comply with
Generally Accepted Accounting Principles (GAAP) to ensure that the financial statements are reliable
and consistent.

2. Adjusting Journal entries

Adjusting journal entries are made at the end of an accounting period to update account balances and
ensure that the financial statements accurately reflect the financial position of the business. Adjusting
entries are necessary because certain transactions may not have been recorded during the accounting
period or may have been recorded incorrectly.

Adjusting entries include accruals, deferrals, and estimates. Accruals are transactions that have been
earned or incurred but have not yet been recorded. For example, if a business has provided services to a
customer but has not yet received payment, an accrual is made to record the revenue earned. Deferrals
are transactions that have been recorded but have not yet been earned or incurred. For example, if a
business has received payment for services that have not yet been provided, a deferral is made to
record the payment as unearned revenue. Estimates are transactions that involve the use of estimates
to record an expense or revenue. For example, if a business estimates that a certain amount of accounts
receivable will be uncollectible, an estimate is made to record the bad debt expense.

Adjusting entries are made to ensure that all revenue and expenses are recorded in the correct
accounting period. This is important to ensure that the financial statements accurately reflect the
financial position of the business. Failure to make adjusting entries can result in inaccurate financial
statements, which can lead to incorrect business decisions.
 3. Closing Journal entries

Closing journal entries are made at the end of an accounting period to close temporary accounts such as
revenue, expense, and dividends accounts. The purpose of closing these accounts is to transfer their
balances to the retained earnings account, which is a permanent account. Closing entries are necessary
to prepare the accounts for the next accounting period.

The closing process begins with the closing of the revenue and expense accounts. The balances in these
accounts are transferred to the income summary account. The income summary account is used to
determine the net income or loss for the accounting period. Once the net income or loss has been
determined, it is transferred to the retained earnings account.

The final step in the closing process is to close the dividends account. The balance in the dividends
account is transferred to the retained earnings account, reducing the retained earnings balance by the
amount of the dividends paid.

Closing journal entries are necessary to ensure that the accounts are ready for the next accounting
period. The process of closing the temporary accounts allows for the accumulation of data over multiple
accounting periods, which can be used to make informed business decisions.

4. Preparation of Classified Balance Sheet

The classified balance sheet is a financial statement that provides information about a company's assets,
liabilities, and equity. It is called "classified" because it categorizes each of these items into
subcategories, making it easier to analyze and understand the company's financial position.

The classified balance sheet consists of two main sections - assets and liabilities and equity. Assets are
listed in order of liquidity, with the most liquid assets listed first. Liabilities are listed in order of
maturity, with the most short-term liabilities listed first. Equity is listed at the bottom of the balance
sheet.

Assets are further classified into current assets and long-term assets. Current assets are assets that can
be converted to cash within one year, such as cash and cash equivalents, accounts receivable, and
inventory. Long-term assets are assets that are expected to provide economic benefits beyond one year,
such as property, plant, and equipment, and intangible assets.

Liabilities are classified into current liabilities and long-term liabilities. Current liabilities are obligations
that must be paid within one year, such as accounts payable, accrued expenses, and short-term debt.
Long-term liabilities are obligations that are not due within one year, such as long-term debt and
deferred taxes.
Equity is classified into common stock and retained earnings. Common stock represents the amount of
money that has been invested in the company by its shareholders. Retained earnings represent the
accumulated profits of the company that have not been distributed as dividends.

The classified balance sheet is an important tool for analyzing a company's financial position. It provides
information about the company's liquidity, solvency, and long-term viability. By categorizing assets and
liabilities into subcategories, the classified balance sheet makes it easier for investors, creditors, and
other stakeholders to understand a company's financial position and make informed decisions about
investing in or lending to the company.

5. Preparation of Multi-step Income Statement

The multi-step income statement is a financial statement that reports a company's revenues, expenses,
gains, and losses for a period of time. The multi-step income statement is called "multi-step" because it
separates the operating activities from the non-operating activities, and it calculates the gross profit,
operating income, and net income separately.

The multi-step income statement consists of three main sections - operating revenues, operating
expenses, and non-operating items. The operating revenues are the revenues that are generated by the
primary operations of the business, such as sales revenue. The operating expenses are the expenses that
are directly related to the operations of the business, such as cost of goods sold, selling expenses, and
administrative expenses. The non-operating items are the gains and losses that are not directly related
to the operations of the business, such as interest income, interest expense, and gains or losses from the
sale of assets.

To prepare a multi-step income statement, the company must first determine its total operating
revenues and subtract its cost of goods sold to calculate its gross profit. The company then subtracts its
operating expenses from its gross profit to calculate its operating income. The non-operating items are
then added or subtracted to calculate the company's net income.

The multi-step income statement provides valuable information about a company's profitability and
operating efficiency. By separating the operating and non-operating items, investors, creditors, and
other stakeholders can better understand the company's financial performance and make informed
decisions about investing in or lending to the company.

6. Periodic vs Perpetual Inventory Journal Entries

Periodic inventory and perpetual inventory are two different methods of inventory accounting. In
periodic inventory, the company counts its inventory at the end of each accounting period, and adjusts
its inventory balance accordingly. In perpetual inventory, the company maintains a continuous record of
its inventory, and updates its inventory balance after every transaction.
The journal entries for periodic inventory and perpetual inventory differ in how they record the cost of
goods sold and the ending inventory balance. In periodic inventory, the cost of goods sold is calculated
at the end of the accounting period by subtracting the beginning inventory balance from the total cost
of goods available for sale, and then subtracting the ending inventory balance. The journal entry to
record the cost of goods sold in periodic inventory is:

Debit Cost of Goods Sold

Credit Inventory

In perpetual inventory, the cost of goods sold is recorded at the time of each sale, based on the cost of
the inventory that was sold. The journal entry to record the cost of goods sold in perpetual inventory is:

Debit Cost of Goods Sold

Credit Inventory

The ending inventory balance is also recorded differently in periodic inventory and perpetual inventory.
In periodic inventory, the ending inventory balance is adjusted at the end of the accounting period
based on the physical count of inventory. The journal entry to record the adjustment for the ending
inventory balance in periodic inventory is:

Debit Inventory

Credit Cost of Goods Sold

In perpetual inventory, the ending inventory balance is updated after every transaction, and no
adjustment is required at the end of the accounting period.

7. Calculation of Inventory (LIFO, FIFO, Average Cost)

LIFO, FIFO, and average cost are three methods of inventory accounting that companies can use to
calculate the cost of goods sold and the value of their inventory.

LIFO (Last-In, First-Out) assumes that the most recently acquired inventory is sold first. This method
results in a lower ending inventory balance and a higher cost of goods sold, which can reduce a
company's taxable income in periods of rising prices. The calculation of inventory under LIFO is based on
the cost of the most recent inventory purchases.

FIFO (First-In, First-Out) assumes that the oldest inventory is sold first. This method results in a higher
ending inventory balance and a lower cost of goods sold, which can increase a company's taxable
income in periods of rising prices. The calculation of inventory under FIFO is based on the cost of the
oldest inventory purchases.

Average cost calculates the cost of goods sold and the value of inventory based on the weighted average
cost of all inventory purchases during the accounting period. This method results in a cost of goods sold
and inventory balance that is somewhere between LIFO and FIFO. The calculation of inventory under
average cost is based on the total cost of all inventory purchases divided by the total number of units of
inventory purchased.

To illustrate these methods, let's consider an example. A company purchased 1,000 units of inventory at
a cost of $5 per unit on January 1, and 1,000 units of inventory at a cost of $7 per unit on June 1. The
company then sold 1,500 units during the accounting period.

Under LIFO, the cost of goods sold would be calculated based on the cost of the most recent inventory
purchases, which is $7 per unit. The cost of goods sold would be 1,000 units at $7 per unit, and 500 units
at $5 per unit, for a total cost of $10,500. The ending inventory balance would be based on the cost of
the oldest inventory purchases, which is $5 per unit. The ending inventory balance would be 500 units at
$5 per unit, for a total value of $2,500.

Under FIFO, the cost of goods sold would be calculated based on the cost of the oldest inventory
purchases, which is $5 per unit. The cost of goods sold would be 1,000 units at $5 per unit, and 500 units
at $7 per unit, for a total cost of $8,500. The ending inventory balance would be based on the cost of the
most recent inventory purchases, which is $7 per unit. The ending inventory balance would be 500 units
at $7 per unit, for a total value of $3,500.

Under average cost, the cost of goods sold and the ending inventory balance would be based on the
weighted average cost of all inventory purchases during the accounting period. The weighted average
cost is calculated by dividing the total cost of all inventory purchases by the total number of units of
inventory purchased. In this example, the weighted average cost is ($5 per unit x 1,000 units) + ($7 per
unit x 1,000 units) divided by 2,000 units, which is $6 per unit. The cost of goods sold would be 1,500
units at $6 per unit, for a total cost of $9,000. The ending inventory balance would be 500 units at $6 per
unit, for a total value of $3,000.

In conclusion, the method of inventory accounting a company chooses to use can significantly impact its
financial statements and taxable income. Companies should carefully consider which method to use
based on their specific circumstances and goals.