ACCOUNTING FOR

MANAGERS

CHAPTER 3

A Review of the Accounting Cycle

By: Mohammed G
Feb, 2022
Jimma, Ethiopia
By; Mohammed Getahun (Msc, Assistant professor)
 Learning Objectives

 Identify and explain the basic steps in the

accounting process (accounting cycle).
 Analyze transactions and make and post
journal entries.
 Make adjusting entries, produce financial
statements, and close nominal accounts.
 Distinguish between accrual and cash-basis
accounting.

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 The purpose of this
chapter is to review the
basic steps of the
accounting process.

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 It refers to a complete sequence of accounting
procedures, which are required to be repeated in the
same order during each accounting period.
 It is complete sequence beginning with the recording
of the transaction and ending with the preparation of
the final accounts.
The Accounting Cycle: Steps
 The sequence of steps in recording transactions:

Identify Analyze
Journal

Financial Trial
Ledger
Statements Balance
 Detailed Steps in the Accounting Cycle
Analyze Journalize Prepare
Post entries
Business transactions unadjuste
to the
Transaction in the d trial
accounts in
s journal. balance.
the ledger.

Post-closing
trial balance Journalize
and post
Prepare Prepare adjusting
Journalize and financial adjusted trial entries
post closing statement
entries s. balance.
By; Mohammed Getahun (Msc, Assistant professor)
 1.Analyze the transaction
 The process starts with source documents, which are
the supporting original records of any transaction.

 A system of recording transactions in a way that

maintains the equality of the accounting equation.

Assets = Liabilities + Owners’ Equity

or
A = L + OE
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 Double-Entry Accounting Facts

 For every transaction, there must be at least

one debit and one credit.
 Debits must always equal credits for each
transaction.
 Debits are always entered on the left side of
an account and credits are always entered on
the right side.

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 2. Journalize the transaction
Φ In the second step, an analysis of the transaction is placed in
the book of original entry, journal, which is a record of how
the transactions affect the balances of applicable accounts..
Debits and Credits
An account shows the effect of transactions on a given asset,
liability, equity, revenue, or expense account.
Double-entry accounting system (two-sided effect).
Recording done by debiting at least one account and crediting
another.
DEBITS must equal CREDITS.
 Journalizing
 Identify the accounts involved with an event or
transaction.
 Determine whether each account increased or
decreased.
 Determine the amount by which each account was
affected.

This process is used whether the

accounting is being done manually or
with a computer.
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 3.Post the transaction to accounts in ledger
 Posting is the process of transferring amounts
from the journal to the general ledger.
 A ledger is a book of accounts in which data
from transactions recorded in the journals are
posted, classified, and summarized.
 A chart of accounts lists all accounts used by
the company.
 All transactions for the same account are
collected and summarized.
 The Accounting Equation
with T-Accounts

Assets = Liabilities + Owners’ Equity

DR CR DR CR DR CR
+ - - + - +

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  An arrangement that shows the
Account
effect of transactions on an account.
 Debit = “Left”
 Credit = “Right”

An Account can be Account Name

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

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 Debits and Credits

If the sum of Debit entries are greater than the sum of

Credit entries, the account will have a debit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 Br.10,000 Br.3,00 Transaction #2

0
Transaction #3 8,000

Balance Br.15,000

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 Debits and Credits

If the sum of Debit entries are less than the sum of Credit
entries, the account will have a credit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 Br.10,000 Br.3,000 Transaction #2

8,000 Transaction #3

Balance Br.1,000

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 Chart of Accounts
ASSETS (100-199) Long-Term Liabilities (220-239)
Current Assets (100-150) 222 Mortgage Payable
101 Cash
105 Accounts Receivable OWNERS’ EQUITY (300-399)
107 Inventory 301 Capital Stock
330 Retained Earnings
Long-Term Assets (151-199)
151 Land SALES (400-499)
152 Building 400 Sales Revenue

LIABILITIES (200-299) EXPENSES (500-599)

Current Liabilities (200-219) 500 Cost of Goods Sold
201 Notes Payable 523 Rent Expense
202 Accounts Payable 528 Advertising Expense
573 Utility Expense
4. Determine Account Balances
and Prepare a Trial Balance
 Determine the account balance for each
T-Account.
 A Trial Balance is a listing of all account
balances. It provides a means to assure
that debits equal credits.
 Prepare An Unadjusted Trial Balance Preparing
Preparing an unadjusted trial balance tests the
equality of debits and credits as recorded in the
general ledger.
Additionally, this provides the balances of all the
accounts that may require adjustment in the next
step.
Debit and credit merely signify position— left
and right, respectively.
Both sided recorded amount must be equal.
By; Mohammed Getahun (Msc, Assistant professor)
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 5. Adjusting of Trial Balance-
The fifth step, adjusting, accounts for internal
transactions, like the use of prepaid rent or
unearned revenue.
Adjustment may be required to record an
expense that may have been incurred but not yet
recorded.

By; Mohammed Getahun (Msc, Assistant professor)

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 The Reporting Phase

 A trial balance is prepared.

 Adjusting entries are recorded.
 Financial statements are prepared.
 Closing entries are made.
 Post-closing trial balance may be
taken.
 6. Adjusting Entries

Adjusting entries are required at the end of

each accounting period for accrual-basis
accounting, prior to preparing the financial
statements. The purpose for adjusting entries
are to:
Φ Bring balance sheet accounts current.
Φ Reflect proper amounts of revenues and
expenses on the income statement.
 Tips Regarding Adjusting Entries
 Analytical Process. You must determine what
original entry was made (if any) and what the ending
balances should be before you know what adjusting
entry to make. You cannot memorize adjusting
entries.
 Adjusting entries always incorporate a balance sheet
account and an income statement account.
 Adjusting entries never involve a cash account.
 Most Common Adjusting Entries
• Unrecorded Revenues--Revenues that have been earned but not yet
recorded.
• Unearned Revenues--Revenues that have been recorded but not yet earned.
• Unrecorded Expenses--Expenses that have been incurred but not yet
recorded.
• Prepaid Expenses--Expenses that have been recorded but not yet incurred.
 Three-Step Process for
Adjusting Entries
 Identify the original entries that were made,
if any. (Original entries are only made for
unearned revenues and prepaid expenses.)
 Determine what the correct balances should
be at this point in time.
 Make the adjustments needed to correct the
balances.
 7. Preparing Financial Statements

• After all transactions have been recorded, a

trial balance prepared, and adjusting entries
made, the financial statements are prepared.
Record Prepare Make Prepare
Trans- Trial Adjusting Financial
actions Balance Entries Statements
 8. The Closing Process
 Real accounts are permanent accounts not closed to
a zero balance at the end of the accounting period.
These accounts are carried forward to the next
period.
 Nominal accounts are temporary accounts that are
closed to a zero balance at the end of each
accounting period.
 Closing entries reduce all nominal accounts to a
zero balance.
 9. Post-Closing Trial Balance
• Provides a listing of all real account
balances at the end of the closing
balance.
• The trial balance assures that total
debits equal total credits prior to the
beginning of the new accounting period.
• Only real accounts will have a balance
at this time.
 Summary of the Accounting Cycle
 Analyze transactions and business documents.
 Journalize transactions.
 Post journal entries to accounts.
 Determine account balances and prepare a trial
balance.
 Journalize and post adjusting entries.
 Prepare financial statements.
 Journalize and post closing entries.
 Balance the accounts and prepare a post-
closing trial balance.
 Special Journals

• A special journal is a book for recording

similar transactions that occur frequently.
• Sales Journal--A record where credit sales
are recorded.
• Subsidiary Ledger--A grouping of
individual accounts that equal the balance
of a control account in the general ledger.
The End