CH-2

ACCOUNTING CYCLE
 Contents
Accounting Cycle

Accounts

Debits credits

The rule of debit &credits

Steps in the Recording Process

 1. Accounting Cycle
Accounting Cycle is the sequence of
accounting procedures of a fiscal period.
Fiscal year begin with the first day of a
particular month selected and end on the last
day of the twelfth month.
 2.The Account

 Record of increases and decreases

Account
in a specific asset, liability, equity,
revenue, or expense item.

An account can be Account Name

illustrated in a T- Debit / Dr. Credit / Cr.
account form.

LO 1 Explain what an account is and how it helps in the recording process.

 3.Debits and Credits
Debit = “Left”
Credit = “Right”
Double-entry system

► Each transaction must affect two or more accounts to

keep the basic accounting equation in balance.

► Recording done by debiting at least one account and

crediting another.

► DEBITS must equal CREDITS.

 3.Debits and Credits

 If Debit amounts are greater than Credit amounts, the

account will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000

Balance $15,000

LO 2 Define debits and credits and explain their use

in recording business transactions.
 3.Debits and Credits

 If Debit amounts are less than Credit amounts, the

account will have a credit balance.
Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3

Balance $1,000

LO 2 Define debits and credits and explain their use

in recording business transactions.
 3. Debit/Credit Rules
Statement of Financial
Position Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit

LO 2 Define debits and credits and explain their use

in recording business transactions.
4. Steps in the Recording Process
Transactions are analyzed and recorded in
the journal,
Transactions are posted to the ledger,

Trial balance is prepared,

worksheet is completed

Adjusting entries are journalized &posted

4.Steps in the Recording Process
Financial statements are prepared

Closing entries are passed

Post-closing trial balance is prepared,

Reversing certain adjusting entries

(optional)
 4.1. Journalizing
Journal is the accounting record in which a
transaction is initially recorded.
It is referred to as “the book of original
entry”
. The process of recording transactions in a
journal is called journalizing.
 4.1.1 Journalizing steps
Record the date:

Record the debit

Record the credit

Write an explanation
4.1.2.Two amount column Journal
Date Description Post Ref. Debit Credit

Year

Month Day Debited Account title

Credited Account title

Explanation
 4.2 Posting
Posting is the process of transferring amounts in
journal to accounts in ledger
Steps of posting
Record the date and amount of Dr. and Cr. entry
to the account,
Insert journal page number in the P.R (Posting
Reference ) column of the account,
Insert the account number in the P.R (Posting
Reference) of the journal.
 4.2.1 Four – Column account
Post Balance
Date Item Debit Credi
Ref.
t

Debit Credit

2
 .3
4.3Trial Balance
Trail balance is the list of accounts and
their balances on specific date.
It is a proof of the equality of Dr.&Cr.

Double-entry accounting requires that

debits must always equal credits.
The trial balance verifies this equality. :
 4.3Trial Balance
Step 1: List the name of the company, the title of
the trial balance, and the date the trial balance is
prepared,
Step 2: List the accounts from the ledger and
enter their debit or credit balance in the Debit or
Credit column of the trial balance,
Step 3: Total the Debit and Credit columns of the
trial balance,
Step 4: Verify that the total of the Debit column
equals the total of the Credit column
 4.3.1.Proof provided by trial Balance
The trial balance does not provide complete
proof of the accuracy of the ledger.
Failure to record a transaction or to post a
transaction,
Recording the same erroneous amount for both
debit and credit part of a transaction,
Recording a single transaction more than once,
Posting a part of a transaction correctly as a
debit or credit but to the wrong account
4.4.Adjustment:
 4.5. Worksheet
Worksheet is a working paper that
accountants can use to summarize
adjusting entries and the account balances
for financial statements.
 A worksheet is an important tool, but is
not an essential part of the accounting
system, like accounts, journal, or ledger;
for example for small companies with few
accounts and adjustments, a worksheet
may not be necessary.
 4.5.Worksheet
A commonly used worksheet has an account
title column and ten (10) columns divided in to
five pairs of debits and credit columns.
The main headings of the five pairs of money
columns are: Trial Balance, Adjustments,
Adjusted Trial Balance, Income Statement, and
Balance sheet
 4.6.Financial Statements
Work sheet is an aid in preparing financial
statement.
The income statement

 statement of owner’s equity

Balance sheet prepared from work sheet.

For Hill Photographic Studio, the financial

statements are presented as follows:
 4.7.Closing Entries
There are two types of accounts:
Temporary or nominal accounts
They serve only for a given accounting
period and it includes;
All income statement accounts and
Drawing account
They are closed at the end of the
accounting period
 4.7.Closing Entries
Permanent or real accounts

They include all balance sheet accounts

including owner’s capital
They are not closed but their balances are
carried forward to the next accounting
period.
 4.7.Closing Entries
 To close all revenue accounts: Each Revenue
account is debited for the amount of its balance, and
Income Summary is credited for the total revenue.
Revenue 1 xxx

Revenue 2 xxx

Revenue 3 xxx

Income Summary xxx

 4.7.Closing Entries
To Close all expense accounts: Each
expense account is credited for the
amount of its balance, and Income
Summary is debited for the total expense.
Income Summary xxx

Expense 1 xxx

Expense 2 xxx

Expense 3 xxx
 4.7.Closing Entries
To Close the Income Summary account:
Income Summary is debited for the
amount of its balance (net income) and
the capital account is credited for the
same amount. (Debit and credit are
reversed if there is net loss.)
 4.7.Closing Entries :
To close the drawing account: The drawing
account is credited for the amount of its
balance, and the capital account is debited
for the same amount. The same is true for
dividend account, dividend account is
credited for its balance and Retained
Earnings is debited for the amount
 4.8 .Post-Closing Trial Balance
The last procedure of the accounting cycle
is the preparation trial balance after all of
the temporary accounts have been closed.
 The purpose is just to make sure that the
ledger is in balance at the beginning the
new accounting period.
The account titles & amounts should agree
exactly with the accounts & amounts listed
on the balance sheet at the end of the
period.
Illustration
Mar 1, 1990. Ann Hill operated a photographic
business her home on a part –time basis. She
decided to move to rented quarters as of March
1 and to devote full time the business which was
to be known as Hill photographic studio.
The following assets were invested in the
enterprise; cash, 3500, accounts Receivable 950
supplies 1200; and photographic equipment
15000.
 There were no liabilities transferred to the
business.
 Transactions
 March 1. Paid 2400 on a rental contract the payment
representing three months’ rent of quarters for the
studio.
 March 4. Purchased additional photographic equipment
on account for 2500
 March 5. Received 850 from customers in payment of
their accounts
 March 6. Paid 125 for a newspaper advertisement –
Advertising expense considered as miscellaneous
expense by Ann Hill.
 March 10. Paid 500 for the debt as a result of March 4
transactions.
 March 13. Paid receptionist 575 for two weeks’ salary
 March 16. Received 1,980 from sale of service
 March 20. Paid 650 for supplies purchase
 Transactions
March 27. Paid 575 receptionists for two weeks’
salary
March 31. Paid 69 for telephone bill for the month
March 31. Paid 175 for electric bill for the month
March 31. Received 1870 from sales of service
March 31. Make sales on account for 1,675.
March 31. Hill withdrew 1500 for her personal use.
Advertising expense, Electric expense, and
telephone expense are classified as miscellaneous
expense.
 Requirement
Journalize transactions
Post transaction
Prepare trial Balance
Pass Adjusting entry
Prepare financial statements
Journalize closing entry
Prepare post closing trial balance