Accounting

Principles

The Accounting
cycle

Author
S / Abdullah Khaled Hamed

X. BODA
 The Accounting Cycle
Concept

Is a collective process of Pros : Cons :

identifying, analyzing 1) Ensure the accuracy of financial statements. 1) Its info. May be biased or non-reliable or
and recording the acc. 2) Provide help in taxation, decision making, non-qualitative.
events of a company. business valuation and info. to decision 2) Can be manipulated (Biased).
makers ( investors or creditors ).
Another Concept

• Is the same for services and

merchandising companies (except
an additional adjusting entry ).

Is a process designed to make

the financial accounting of
business activities easier for
business owners.

❑ These accounting cycle is assumed for sole proprietorship.

 Steps of the Accounting Cycle
Analyze
➢ Compose of 9 steps.
Post- • Steps 1:3 occur day-by-day.
closing Journalize • Steps 4:7 occur periodically (monthly, quarterly or
T.B annually).
• Steps 8-9 usually occur at the end of the accounting
period.

Closing
Posting
entries

Financial Trial
statements ➢ Optional steps
Balance
1) Worksheet to prepare adjusting entries and financial
statements.
2) Reversing Entries
Adjusted Adjusting
trial
balance entries ➢ Avoidable step
• Correcting Entries
 1. Analyze business transactions

Divided into 3 types :

1. Basic analysis
2. Equation analysis Its purpose is to identify the accounts
3. Debit-Credit analysis involved, then determine whether to
Is an invisible step non-seen.
make Debit or Credit balance.

Before going to the second step, we have to illustrate the normal account balances as follow;

Is to enter
transactions’ data into
general journal.
Transactions’ data are
initially recorded in
chronological order.
Is referred to as the book of original entry.
Shows the debit and credit effects on specific accounts.
2. Journalizing
Process : Assets increase debited We must follow the double entry
Assets decrease credited system of accounting.
Liabilities increase credited Dr = Cr
Liabilities decrease debited
• ( Rev. and capital like liabilities )
• ( Exp. And drawings like assets ) Journal
Technique of journal
Divided into 2 basic sections:
1) General Journal
2) Special Journals
• Cash payment journal
• Cash receipts journal
• Purchases journal
• Sales journal
 3. Posting
The procedure of transferring journal entries to the ledger accounts. Should be performed in chronological order.

The ledger is arranged in this sequence :

Assets Liabilities Capital Drawing Revenues Expenses Ledger
Dr acc Title Cr
T account form
Formal form = Three-column form = Standard form

Divided into 2 basic types :

1) General ledger
2) Special ledger
• Purchases ledger
• Sales ledger

• The ledger shows the balance in each of the accounts.

• The balance of ledger may be:
Debit balance or Credit balance or Zero balance
 4. Trial Balance

Is a list of accounts and their balances at a given time. Proves the equality of debits and credits after posting.

Company Name
Trial Balance
Date
Accounts Titles Dr Cr

Total XXXX XXXX

The order of presentation in the trial balance is:

Assets Liabilities Capital Drawings Revenues Expenses

 5. Adjusting Entries
Ensure that the revenue recognition and Every adjusting entry will include one income
expense recognition principles are followed. statement account and one balance sheet account.

Prepaid Expense Deferrals Unearned revenue

• Supplies Dr Cr
Dr Cr Unearned revenue XX
Supplies expense XX services revenue XX
supplies XX
• Depreciation Accruals Accrued revenue
Dr Cr
Dr Cr
Depreciation expense XX
Accumulated Depreciation XX A/R XX
services revenue XX
• Allowance for doubtful account
Dr Cr Dr Cr
Bad debts expense XX Accrued expense ………. expense XX
Allowance for doubtful XX ……… payable XX
 6. Adjusted Trial Balance
Prepared after adjusting entries had been made.
Prove the equality of the total debit balances and the total credit balances
in the ledger after all adjustments.
Is the primary basis for the preparation of financial statements.

Concept
7. Financial Statements
Purposes • Show how a business operates.
Are written records that convey the business activities
• Show revenues and costs.
and the financial performance of a company.
• Efficiency of business.

Income statement
• Presents the revenues and
expenses and net income or
net loss.
• Financial Performance
Balance Sheet
• Reports assets, liabilities,
and capital at a specific
date.
• Financial Health
O.E or R.E statement
• Shows the changes in
owner’s equity or (R.E).
Cash Flow Statement
• Cash inflow & outflow
• Cash Management
7.1 Income Statement
Measures Profitability.

Its Equation :
• 𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔 − 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔 = 𝒏𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆

Operating activities

Non-Operating
activities
 7.2 O.E or Retained Earnings Statement

Enterprise name Corporation name

Owner’s equity statement Retained Earnings statement
Date Date
Capital Jan.1 (beginning owner’s equity) 100,000 Beginning retained earnings

Add : Additional investments 30,000 Add : Net income

Net income 70,000
Less : Dividends Declared (XXXXX)
Less : withdrawals (10,000)
( Net loss ) Ending retained earnings XXXXXXX

Capital Dec.31 (ending owner’s equity) 190,000

Result of Income statement

Their Equation :
• 𝑩𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 𝑶. 𝑬 + 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕𝒔 + 𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝑫𝒓𝒂𝒘𝒊𝒏𝒈𝒔 = 𝑬𝒏𝒅𝒊𝒏𝒈 𝑶. 𝑬
• 𝑩𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 𝑹𝒆𝒕𝒂𝒊𝒏𝒆𝒅 𝒆𝒂𝒓𝒏𝒊𝒏𝒈𝒔 + 𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 − 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅𝒔 = 𝑬𝒏𝒅𝒊𝒏𝒈 𝑶. 𝑬
 7.3 Balance Sheet
Enterprise Name Its Equation :
Balance Sheet • 𝑨𝒔𝒔𝒆𝒕𝒔 = 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝒐𝒘𝒏𝒆𝒓′ 𝒔 𝒆𝒒𝒖𝒊𝒕𝒚
Date
Assets Continued
Current Assets
Cash
Liabilities and O.E
Accounts receivable Current Liabilities
Notes receivable Accounts payable
Supplies Notes payable
Merchandise Unearned services revenue
Salaries and wages payable
Prepaid insurance
Interest payable
Non-current Assets Long-term Liabilities
Land Mortgage payable
Buildings Loans payable
Less: Accumulated depreciation-building Notes payable
Equipment Total liabilities
Owner’s equity
Less: Accumulated depreciation-equipment Owner’s capital
Total Assets Total liabilities and O.E
 7.4 Cash flow statement
❑ A statement which shows cash changes from 3 activities during the period.
The primary purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of
an enterprise during a period.
Cash receipts = Cash inflows
Cash payment = (Cash outflows)
Before going to the eighth step, we have to illustrate classifications of accounts as follow;

8. Closing Entries

Sole proprietorship & Partnership Corporation

Sole proprietorship & Partnership & Corporation

1) Close Revenues to Income Summary.

Dr Cr
Revenues XX
Income Summary XX
2) Close Expenses to Income Summary.
Dr Cr
Income Summary XX
Expenses XX
3) Close Income Summary to Owner’s Capital.
Dr Cr Net Income Dr Cr
Income Summary XX Capital or ( R.E ) XX
Capital or ( R.E ) XX Net Loss Income Summary XX
4) Close Owner’s Drawings to Owner’s Capital.
Dr Cr
Capital XX
Drawings or ( Dividends ) XX
 9. Post-Closing Trial Balance

Is prepared after closing entries have been posted to the ledger. Includes only permanent accounts.
Prove the equality of the permanent account balances carried
forward into the next accounting period.
JULIE’S MAIDS CLEANING SERVICE
Post-Closing Trial Balance
July 31, 2010
Debit Credit
Cash ....................................................................................................................... $ XXX
Accounts Receivable ............................................................................................. XXX
Cleaning Supplies .................................................................................................. XXX
Prepaid Insurance .................................................................................................. XXX
Equipment ............................................................................................................. $ XXX
Accumulated Depreciation—Equipment .............................................................. XXX
Accounts Payable .................................................................................................. XXXX
Notes payable ………………………………………………………………………………………………….. XXXX
Unearned revenue ………………………………………………………………………………………….. XXX
Salaries Payable .................................................................................................... XXX
Capital ............................................................................................. XXX

XXXX XXXX
 Comprehensive Problem
Julie Molony opened Julie’s Maids Cleaning Service on July 1, 2010. During July, the company completed the following
transactions.

July 1 Invested $14,000 cash in the business.

1 Purchased a used truck for $10,000, paying $3,000 cash and the balance on account.
3 Purchased cleaning supplies for $800 on account.
5 Paid $1,800 on a one-year insurance policy, effective July 1.
12 Billed customers $3,800 for cleaning services.
18 Paid $1,000 of amount owed on truck, and $400 of amount owed on cleaning supplies.
20 Paid $1,600 for employee salaries.
21 Collected $1,400 from customers billed on July 12.
25 Billed customers $1,500 for cleaning services.
31 Paid gas and oil for the month on the truck, $400.
31 Withdrew $600 cash for personal use.

The chart of accounts for Julie’s Maids Cleaning Service contains the following accounts: No. 101 Cash, No. 112 Accounts
Receivable, No. 128 Cleaning Supplies, No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated
Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries Payable, No. 301, Julie Molony, Capital; No. 306
Julie Molony, Drawing; No. 350 Income Summary, No. 400 Service Revenue, No. 633 Gas & Oil Expense, No. 634
Cleaning Supplies Expense, No. 711 Depreciation Expense,No. 722 Insurance Expense, and No. 726 Salaries Expense.
Required

(1) Journalize and post the July transactions. Use page J1 for the journal.
(2) Prepare a trial balance at July 31 on a worksheet.
(3) Enter the following adjustments on the worksheet, and complete the worksheet.
(a) Earned but unbilled fees at July 31 were $1,300.
(b) Depreciation on equipment for the month was $200.
(c) One-twelfth of the insurance expired.
(d) An inventory count shows $100 of cleaning supplies on hand at July 31.
(e) Accrued but unpaid employee salaries were $500.

(4) Prepare the income statement and statement of owner’s equity for July, and a classified balance sheet at July 31, 2010.
(5) Journalize and post the adjusting entries. Use page J2 for the journal.
(6) Journalize and post the closing entries, and complete the closing process. Use page J3 for the journal.
(7) Prepare a post-closing trial balance at July 31.
 General Journal J1
Date Account Titles and Explanation Ref. Debit Credit
July 1 Cash .................................................................................................................................................. 101 14,000
Julie Molony, Capital ............................................................................................................... 301 14,000
1 Equipment ....................................................................................................................................... 157 10.000
Cash ............................................................................................................................... 101 3,000
Accounts Payable .......................................................................................................... 201 7,000
3 Cleaning Supplies ............................................................................................................................ 128 800
Accounts Payable ................................................................................................. 201 800
5 Prepaid Insurance ........................................................................................................................... 130 1,800
Cash ............................................................................................................................ 101 1,800
12 Accounts Receivable ........................................................................................................................ 112 3,800
Service Revenue .......................................................................................................... 400 3,800
18 Accounts Payable ............................................................................................................................ 201 1,400
Cash .............................................................................................................................. 101 1,400
20 Salaries Expense ............................................................................................................................... 726 1,600
Cash ................................................................................................................................ 101 1,600
21 Cash .................................................................................................................................................. 101 1,400
Accounts Receivable ......................................................................................................... 112 1,400
25 Accounts Receivable ....................................................................................................................... 112 1,500
Service Revenue ............................................................................................................... 400 1,500
31 Gas & Oil Expense ......................................................................................................................... 633 400
Cash .................................................................................................................................... 101 400

31 Julie Molony, Drawing .................................................................................................................... 306 600

Cash ....................................................................................................................................... 101 600
 Cash No.101 A/R No.112
Date Explanation Ref. Debit Credit Balance Date Explanation Ref. Debit Credit Balance
July 1 J1 14,000 14,000 July 12 J1 3,800 3,800
1 3,000 11,000 3 1,400 2,400
5 1,800 9,200 21 1,500 3,900
18 1,400 7,800 25 1,300 5,200
20 1,600 6,200 31 Adjusting
21 1,400 7,600
Cleaning Supplies No. 128
31 400 7,200
31 600 6,600 Date Explanation Ref. Debit Credit Balance
July 3. J1 800 800
Prepaid Insurance No. 130 31 J2 700 100
Adjusting
Date Explanation Ref. Debit Credit Balance
Equipment No. 157
July 5 J1 1,800 1,800
31 Adjusting J2 150 1,650 Date Explanation Ref. Debit Credit Balance
July 1 J1 10,000 10,000
A/P No. 201
Accumulated Depreciation—Equipment No. 158
Date Explanation Ref. Debit Credit Balance
Date Explanation Ref. Debit Credit Balance
July 1 J1 7,000 7,000
3 800 7,800 July 31 Adjusting J2 200 200
18 1,400 6,400
Julie Molony, Capital No. 301
Salaries payable No. 212 Date Explanation Ref. Debit Credit Balance
Date Explanation Ref. Debit Credit Balance July 1 J1 14,000 14,000
31 Closing J3 3,050 17,050
July 31 Adjusting 500 500
31 closing J3 600 16,450
 Service Revenue No. 400 Insurance Expense No. 722
Date Explanation Ref. Debit Credit Balance Date Explanation Ref. Debit Credit Balance
July 12 J1 3,800 3,800 July 31 Adjusting J2 150 150
25 J1 1,500 5,300 31 closing J3 150 0
31 Adjusting J2 1,300 6,600
31 closing J3 6,600 0 Gas & Oil Expense No. 633
Date Explanation Ref. Debit Credit Balance
Income Summary No. 350 July 31 J1 400 400
Date Explanation Ref. Debit Credit Balance 31 closing J3 400 0

July 31 Closing J3 6,600 6,600

Cleaning Supplies Expense No. 634
31 Closing J3 3,550 3,050
31 closing J3 3,050 0 Date Explanation Ref. Debit Credit Balance
July 31 Adjusting J2 700 700
31 closing J3 700 0
Julie Molony, Drawing No. 306
Date Explanation Ref. Debit Credit Balance Depreciation Expense No. 711
July 1 J1 600 600 Date Explanation Ref. Debit Credit Balance
31 closing J3 600 0
July 31 Adjusting J2 200 200
31 closing J3 200 0
Salaries Expense No. 722
Gas & Oil Expense No. 633
Date Explanation Ref. Debit Credit Balance
July 20 J1 1,600 1,600 Date Explanation Ref. Debit Credit Balance
31 Adjusting J2 500 2,100 July 31 J1 400 400
31 closing J3 2,100 0 31 closing J3 400 0
 JULIE’S MAIDS CLEANING SERVICE
Income Statement
For the Month Ended July 31, 2010
Revenues
Service revenue................................................................................... $6,600
Expenses
Salaries expense.................................................................................. $2,100
Cleaning supplies expense ................................................................. 700
Gas & oil expense............................................................................... 400
200
Depreciation expense.........................................................................
150
Insurance expense..............................................................................
3,550
Total expenses .......................................................................
$3,050
Net income............................................................................................

JULIE’S MAIDS CLEANING SERVICE

Statement of Owner’s Equity
For the Month Ended July 31, 2010
Julie Molony, Capital, July 1 ............................................................................... $0
Add: Investments ...................................................................................... $14,000
Net income ........................................................................................ $3,050 17,050

Less: Drawings ............................................................................................ 600

Julie Molony, Capital, July 31 ............................................................................... $16,450

 JULIE’S MAIDS CLEANING SERVICE
Balance Sheet
July 31, 2010
Assets
Current assets
Cash..................................................................................................................................... $6,600
Accounts receivable............................................................................................................ 5,200
Cleaning supplies ............................................................................................................... 100
Prepaid insurance................................................................................................................ 1,650
Total current assets............................................................................................. $13,550
Capital assets
Equipment......................................................................................................................... 10,000
Less: Accumulated depreciation........................................................................................ 200
Total assets....................................................................................................... 9,800
Liabilities and Owner’s Equity $23,350
Current liabilities
Accounts payable ...................................................................................................... $6,400
Salaries payable ................................................................................................................ 500
Total current liabilities........................................................................................................ $6,900
Owner’s equity
Julie Molony, Capital........................................................................................................... 16,450

Total liabilities and owner’s equity ..................................................................... $23,350

 General Journal J2
Date Account Titles and Explanation Ref. Debit Credit
July 31 Accounts Receivable ................................................................................................................ 112 1,300
Service Revenue .............................................................................................. 400 1,300
31 Depreciation Expense ............................................................................................................. 711 200
Accumulated Depreciation—Equipment 158 200

31 Insurance Expense.................................................................................................................... 722 150

Prepaid Insurance .............................................................................................. 130 150
31 Cleaning Supplies Expense...................................................................................................... 634 700
Cleaning Supplies ................................................................................................ 128 700
31 Salaries Expense........................................................................................................................ 726 500
Salaries Payable................................................................................................... 212 500
General Journal J3
31 Service Revenue...................................... 400 6,600
Income Summary......................... 350 6,600
31 Income Summary .................................... 350 3,550
Salaries Expense .......................... 726 2,100
Depreciation Expense................. 711 200
Insurance Expense..................... 722 150
Cleaning Supplies Expense ...... 634 700
Gas & Oil Expense ....................... 633 400
31 Income Summary .................................... 350 3,050
Julie Molony, Capital ................... 301 3,050
31 Julie Molony, Capital............................. 301 600
Julie Molony, Drawing................. 306 600
 JULIE’S MAIDS CLEANING SERVICE
Post-Closing Trial Balance
July 31, 2010
Debit Credit
Cash ....................................................................................................................... $ 6,600
Accounts Receivable ............................................................................................. 5,200
Cleaning Supplies .................................................................................................. 100
Prepaid Insurance .................................................................................................. 1,650
Equipment ............................................................................................................. 10,000
Accumulated Depreciation—Equipment .............................................................. $ 200
Accounts Payable .................................................................................................. 6,400
Salaries Payable .................................................................................................... 500
Julie Molony, Capital ............................................................................................. 16,450

$23,550 $23,550