THE ACCOUNTING CYCLE

.The Accounting Cycle • The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.

Accounting Cycle Journalize Transaction Post to Accounts Adjust Accounts Close Accounts Prepare Financial Statements .

May be external or internal. An account represents an area of similar economic interest. Generally triggers a change in assets. – Account: A systematic recording of transactions or events that affect assets. liabilities or equity. – Event: A happening of consequence. – Transaction: An external event involving a transfer or exchange between two or more entities. liabilities. equity. . revenue and expense areas.Basic Terminology • The following is a brief summary of selected terms.

This cycle is depicted diagrammatically below: .There is a cycle of action in accounting for any business.

bank deposit slips and even internet payment confirmations are all source documents. cash slips. they are the first documents that exist relating to a transaction. . Invoices. invoices. such as cash slips. check counterfoils. that form the source of (and serve as proof for) a transaction. etc. SOURCE DOCUMENTS Source documents are documents. In other words.1. receipts.

.2. Journals are that first basic entry of debit and credit for each transaction. JOURNALS • These are chronological (date-order) records of transactions entered into by a business. • Our recording in the journal is also called a journal or a journal entry. • It used to be an actual book that the bookkeeper would use to make accounting entries.

The journals look like this: .

3. (A ledger of accounts is like a school of fish). . LEDGER (T-ACCOUNTS) • .The ledger is a collective term for the accounts of a business. The accounts are in the shape of a ‘T’ and thus are often referred to as ‘T-accounts’.

). For example.000.4. . TRIAL BALANCE • A sheet displaying all the accounts of a business. The balance in the bank account on the 1st of January was $5. drawn up as a trial (test) of whether the total of all the debit balances equal the total of all the credit balances (A balance is the amount of an item at a point in time. The trial balance is prepared as a final check just before the financial statements are drawn up.

Financial statements are the most important reports of a business. financial performance and cash flows of a business.5. These statements are prepared from the information in the trial balance. FINANCIAL STATEMENTS • A statement is a report. . as well as other useful information concerning the business. Financial statements are usually prepared once a year. The purpose of these statements is to show the reader the financial position.

Debits & Credits – Debits and credits: • Debit means entering an amount on the left-hand side of an account. It does not mean increase or decrease. It does not mean increase or decrease. • Credit means entering an amount on the right-hand side of an account. .

• Debits do not mean increase. • Credits do not mean decrease. • Credits are the right of the T account. • Debits are not “good” or “bad”. • Credits are not “good” or “bad”. .Debits & Credits • Debits are the left of the T account.

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