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Accounting Cycle
The accounting cycle is set of steps followed
by accountants to record financial
transactions and prepare the financial
statements.
The cycle starts with the first financial
transaction in the period and ends with
closing the accounts after preparing the
financial statements.
These steps are repeated for each accounting
period.
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1) Identification and measurement of transactions
that should be recorded on the accounting records.
2) Recording these transactions on the Journal using
the Journal Entries.
3) Transferring (Posting) the entries from the journal
to related Accounts in the Ledger.
4) Preparing the Trial Balance.
5) Preparing the Financial Statements.
6) Closing the Temporary Accounts at the end of the
accounting period
7) Preparing Trial Balance after closing accounts
8) Preparing the Financial Statements after closing.
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➢ These steps can be shown as follows:
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Steps to do journal entry:
1. Determine the impact of the transaction on the elements of the
financial position of the company (Assets, Liabilities, Capital,
Expenses, and Revenues).
2 -Determine the nature of impact (increase or decrease on the
elements)
3 -Determine the amount.
4 - Expression of increase and decrease to debt side and credit side and
application of the rule of double entry.
Note: 1- Double-entry rule means: Any financial transaction undertaken by the
company have two sides, debit side and credit side, the debit side must be equal to
the credit side.
2- When we write journal entry, we must start first debit side then credit side.
Example (1):
1 - On October 1, 2020, Ali began his business or (invested) with of 60,000 cash
capital cash
Asset
Owners
Equity +
+ 60,000
60,000 Debit side
Credit side
Cash 60,000
Capital 60,000
Asset Asset
+ -
15000 15,000
Debit side Credit side
Furniture 15,000
Cash 15,000
3 - On October 9, Purchase equipment for 30,000 from future company
on account
Equipment 30,000
Future company 30,000
(Accounts payable)
4 - On Oct 13 provide services for 40,000 to Customers, receive 25,000
cash
Cash 25,000
The journal is referred to as the book of original entry for each transaction,
the journal shows the debit and credit effects on specific accounts. The
journal has spaces for dates, account title, and two amount columns of
debit and credit.
Journalizing:
The next figure shows the Journal format and the technique of
journalizing, using the example (1):
Journal
Date Account Title Debit Credit
2020
Capital 60,000
(Owner's investment of Cash)
(A/P)
(Purchase of equipment on account)
85,000 15,000
Dr. Capital Cr
0 60,000 Cash
0 60,000
0
15,000
Dr. Equipment Cr
30,000 Future company 0
(A/P)
30,000 0
0 30,000 Equipment
0 30,000
30,000 Credit Balance
15,000 0
15,000 Debit Balance
15,000 Accounts
Receivable (A/R)
0 40,000
40,000 Credit Balance
(3) Prepare a Trial Balance:
A trial balance is a list and total of all the debit and credit accounts for any entity for a given period. The
format of the trial balance is a two-column schedule with all the debit balances listed in one column and all the
credit balances listed in the other. The trail balance is prepared after all the transactions for the period have
been journalized and posted to the ledger, and a trial balance is useful in the preparation of financial statement.
The steps for preparing a trial balance are: -
1 -List the account titles and their balances in the appropriate debit or credit column.
5 -Offsetting errors are made in recording the amount of a transaction. If equal debits and credits are posted
even to the wrong account or in the wrong amount that the total debits will equal the total credits.
The trial balance does not prove that the company has recorded all transactions of that the ledger is correct.
Trial Balance
Balance
Account
Debit Credit
Cash 70,000
Capital 60,000
Furniture 15,000
Equipment 30,000
Future Company (A/P) 30,000
Accounts Receivable (A/R) 15,000
Services Revenue 40,000
130,000 130,000
Total
1) Identifying and measuring Transactions that should be
recorded: The first step analysis of transactions to
determine what should be included in the records.
2) Recording in the general journal: The second step is
recording of the transactions in the general journal. So,
the general journal is a historical record for all
transactions and events. A page of the general journal
includes the following information:
a) Date of the transaction.
b) Explanation of the transaction.
c) Page number of the ledger.
d) Amounts of the debit and credit.
e) Additional column for document number or entry
number.
The following is a typical page of the general journal.
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Amounts
Date Explanation
Debit Credit
journal entries
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The following transactions occurred in a service firm during
January 2022:
1) January 1, The owner deposited EGP 200,000 cash in the bank as
capital for the business.
2) January 5, The owner got EGP 50,000 loan from the bank for the
business.
3) January 10, Purchased an office building for EGP 70,000 cash.
4) January 15, Purchased office supplies for EGP 1,000 on credit.
5) January 20, Provided services to customers for EGP 8,000 on credit.
6) January 25, Provided services to customers in cash for EGP 4,000.
7) January 30, Collected the amounts due from customers of January 20.
8) January 31, Paid the amounts due to office supplies.
9) January 31, Paid EGP 3,000 salaries to employees.
Required:
a) Analyze the above transactions to show the debit and credit.
b) Record the above transactions on the general journal.
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Solution
a. Analysis of transactions for debit and credit:
Date Transaction Analysis of Debit Credit
transaction accounts accounts
1/1 Deposit Increase cash EGP Cash Capital
EGP 200,000 200,000 EGP EGP
capital Increase Capital EGP 200,000 200,000
200,000
1 -He invested 500,000 consists of land for 150,000, Equipment for 100,000, Building for 120,000,
2 -On July 3, he purchased furniture for 50,000 from golden company on account.
3 -On July 5, he purchased car for 100,000 from international company, paid 30,000 cash, and the
rest on account.
8 -On July 27, Mohamed withdraws 5,000 in cash from the firm for his personal use.
Journal
Date Explanation Debit Credit
2021 Land 150,000
July 1 Equipment 100,000
Building 120,000
Cash 130,000
Capital 500,000
July 3 furniture 50,000
Golden company (A/p) 50,000
July 5 Cars 100,000
Cash 30,000
International company (A/p) 70,000
July 8 United company (A/R) 20,000
Equipment 20,000
July 13 Wage's expense 6,000
Cash 6,000
July 20 Golden company (A/P) 10,000
Cash 10,000
July 25 Cash 15,000
United company (A/R) 15,000
July 27 Withdrawals 5,000
Cash 5,000
3. Transferring (Posting) Journal Entries (debit
and credit) to ledger accounts:
After recording transactions in the journal,
the debit and credit entries should be
transferred to the ledger accounts to classify
the transactions.
The transfer process is called posting the
journal entries to the accounts in the ledger.
The ledger contains all accounts, one page for
each item (account) of the financial statements.
The ledger account can be prepared in two
different methods.
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A. The two sides account (The T Account):
The account is divided in two sides, the left side for the
debit entries and the second side for the credit entries of
the item.
Each side contains the following columns:
1) Amounts of the entry as it was recorded in the journal.
2) Explanation of the transaction.
3) Number of the journal page for future reference.
4) Date of recording in the journal.
The account can be shown as follows:
DR The account ……… CR
Date Explanation Amount Date Explanation Amount
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B. The account with running balance (This format is
cancelled.):
This method prepares the ledger account to show the balance after
each posting each entry.
In the two sides accounts the balance of the account can be only
determined at the end of the period.
The running balance account contains the following columns:
1. Date of recording in the journal.
2. Explanation of the transaction.
3. Number of the journal page for future reference.
4. The debit amounts.
5. The credit amounts.
6. The balance.
A typical page of the running balance account looks as follows:
Date Explanation Debit Credit Balance
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We will study only the two sides method
because it is widely used in practice.
How to post to the ledger accounts?
1) Post to the account debited: the date, journal
page, and debit amount as it is in the journal.
2) Go back to the journal and write the account
number to which the debit amount was posted.
3) Post to credit side of the account credited in the
journal the date, journal page, and credit
amount as it is in the journal.
4) Go back to the journal and write the account
number to which the credit amount was posted.
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➢ Ahmed purchased furniture on 5/1 for EGP 9,000
from MIFCCO on credit.
Required:
a) Prepare the journal entry to record this transaction
in the journal.
b) Post the journal entry to related accounts in the ledger.
Solution
➢ a. Recording the transaction in the journal:
Amounts
Date Explanation
Debit Credit
January Furniture 9,000
5 A/P-MIFCCO 9,000
Purchase of furniture on credit
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b. Posting to the debit side of Furniture account
and the credit side of Accounts Payable –
MIFCCO:
DR Furniture CR
Date Explanation Amount Date Explanation Amount
A/P-
Jan 5 9,000
MIFFCO
DR Accounts Payable (MIFCCO) CR
Date Explanation Amount Date Explanation Amount
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4. Balancing the accounts:
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➢ Recording the transactions on the general journal:
Amounts
Date Explanation
Debit Credit
January Cash 200,000
1 Capital 200,000
The business started
5 Cash 50,000
Loans 50,000
Getting Loan from bank
10 Building 70,000
Cash 70,000
Purchase office building cash
15 Office supplies 1,000
Accounts Payable 1,000
Purchase office supplies on credit
20 Accounts Receivable 8,000
Revenues 8,000
Provide service on credit
25 Cash 4,000
Revenues 4,000
Provide services in cash
30 Cash 8,000
Accounts Receivable 8,000
Collect Accounts Receivable
31 Accounts Payable 1,000
Cash 1,000
Paid cash to Accounts Payable (Creditors)
31 Salaries Expenses 3,000
Cash 3,000 33
Paid salaries to Employees
Example 3-3:
Refer to the Example 3-1.
Required:
a) Prepare the necessary accounts.
b) Post the journal entries to the related accounts.
c) Compute the balances for all accounts.
Solution
a. Preparing the accounts:
Cash
Date Explanation Amount Date Explanation Amount
1/1 Capital 200,000 10/1 Building 70,000
5/1 Loans 50,000 20/1 A/P 1,000
25/1 Revenues 4,000 31/1 Salaries exp. 3,000
30/1 A/R 8,000
Total 262,000 Total 74,000
Balance 188,000
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Capital
Date Explanation Amount Date Explanation Amount
31M 0 1/1 Cash 200,000
Balance 200,000
Loans Payable
Date Explanation Amount Date Explanation Amount
31/1 0 5/1 Cash EGP 50,000
Balance EGP 50,000
Building
Date Explanation Amount Date Explanation Amount
10/1 Cash 70,000 31/12 0
Balance 70,000
Office Supplies
Date Explanation Amount Date Explanation Amount
15/1 A/P 1,000 31/1 0
Balance 1,000
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Accounts Payable
Date Explanation Amount Date Explanation Amount
31/1 Cash 1,000 15/1 Office supplies 1,000
Accounts Receivable
Date Explanation Amount Date Explanation Amount
20/1 Revenues 8,000 30/1 Cash 8,000
Revenues
Date Explanation Amount Date Explanation Amount
31/1 0 20/1 A/R 8,000
25/1 Cash 4,000
Total 12,000
31/1 Balance 12,000
Salaries Expenses
Date Explanation Amount Date Explanation Amount
31/1 Cash 3,000 31/1 0
Balance 3,000
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5. Preparing the trial balance:
➢ After finishing the balancing of the accounts and
computing the final balance for each account, the
next step is to prepare a list of all accounts and their
balances. This list is called the trial balance.
➢ Preparing the trial balance services three functions:
A. It is an evidence of the equality of the debit and
credit amounts in the ledger.
B. Provides the basis for any adjustments
C. It is used to prepare the financial statements.
➢ Preparing the trial balance can be prepared in two
different methods:
1) Trial balance in totals:
2) Trial balance with balances: 37
The following is a typical page of the trial
balance:
Name of the company
The Trial Balance ××××
Amounts
Accounts
Debit Credit
Debit accounts ××
××
Credit accounts
Total ×× ××
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➢ Prepare the trial balance with balances for the
previous example:
Solution
Ahmed Company
The Trial Balance, January 31, 2022
Amounts
Accounts
Debit Credit
Cash 188,000
Office Supplies 1,000
Building 70,000
Loans Payable 50,000
Ahmed's Capital 200,000
Revenues 12,000
Salaries Expenses 3,000
Total 262,000 262,000 39
6. Preparing the Financial Statements:
After we prepare the trial balance, we prepare the
financial statements.
We start by preparing the income statement.
The income statement includes revenues and gains
less expenses and losses. The difference is:
▪ Net income (profit), if revenues and gains
exceed expenses and losses, Or
▪ Net loss, if expenses and losses exceed
revenues and gains.
We prepare the statement of owner' s equity after
the income statement.
The final balance of owner's equity statement is
transferred to the statement of financial position. 40
The statement of financial position can
be classified to:
▪ Assets: are classified into two categories
current and noncurrent assets.
▪ Liabilities: are also classified into current
liabilities and long-term liabilities.
Current assets: are those assets which can be
converted into cash or used up within one year
or the operating cycle whichever is longer.
Current assets include cash, marketable
securities, A/R, N/R, Prepaid expenses,
accrued revenues.
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Noncurrent assets: are all assets which are not current
assets. Noncurrent assets are classified into: Property,
plant and equipment, intangible, natural and other
assets.
a) Property, plant and equipment includes Land,
Building, Equipment, furniture and cars.
b) Intangible assets: are long-term rights of the
company like patents, copyrights, trade names and
trademarks, franchises, and goodwill. These assets do
not have physical appearance.
c) Natural resources: are noncurrent assets that are
made by nature such as forests, mines, and oil fields.
d) Other noncurrent assets: any other noncurrent
assets.
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Current liabilities: are those liabilities that will
be settled within one year or the operating
cycle, whichever is longer. They include A/P, N/P,
expenses payable, current loans and unearned
revenues.
Long-term liabilities: any liability which is
not current liabilities. It includes long term
loans, and bonds payable.
Owner's equity: is the residual value of assets
after subtracting liabilities. It will be affected
by all transactions of: revenues, expenses,
investments and withdrawals by owners.
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