Accounting
Cycle
Step 1
Collect and Verify Source
Documents
Source documents are the evidence
that a transaction or event happened
in the business
Types:
• Invoice
• Check Stub
• Receipt
• Memorandum
Step 2
Analyze each transaction
1. Determine accounts effected
2. Determine account type
3. Determine increase or decrease
4. Determine debit(s) and credit(s)
Part of step 2
Debits and credits
 Here's
a Tip-- Debit means left Credit means right
Generally these types of accounts are increased with
a debit:
 Dividends (Draws)
Expenses
Assets
Losses
 Generally these types of accounts are increased
with a credit:

Gains
Income
Revenues
Liabilities
Stockholders' (Owner's) Equity
Step 3
Journalize each transaction
businesses record all activity that happens in
their business each day in a journal.
1.Date
2.Account Debited
3.Amount Debited
4.Account Credited (indent slightly)
5.Amount credited
Sample of Journal
Step 4
Post to the ledger
Record for each individual account.
Each account has it’s own ledger. That is just
an individual record for that account. So all
the transactions that effect the Cash
account would be posted (recorded) into
the Cash account.
Sample of Ledger
Step 5
Prepare a Trial Balance
This is to ensure that the accounting
equation is still in balance. It is a listing of all
the accounts and their balances.
You add the debit balances, then the
credit balances, and then check to make
sure that they are equal. It is completed in
the first columns of the worksheet, but must
balance before the rest of the worksheet is
completed.
Sample trial
Balance
Step 6
Prepare a Worksheet
The worksheet is where you gather all
the information needed to prepare
the financial statements.
Some accounts need to be adjusted
to bring their balances current before
the financial statements are
completed.
Sample worksheet
Step 7
Prepare the financial statements
1. The Income Statement - shows how much
money the business has made (or lost)
during a period of time.
2. The Statement of Owner’s Equity - a report
for the owner of the business to show how the
business operations have effected his/her
investment during a time period.
3. The Balance Sheet makes sure that the
debits equal the credits at a point in time.
Step 8
Journalize and Post the closing
entries
Step 9
Prepare a Post-Closing Trial
Balance
This is just to make sure that all the
debits equal all the credits are still
equal and that the accounting
equation is in balance before the
next time period begins.
Then it starts over again
Understanding
Financial
Statements


What is a Balance Sheet?
A statement that shows




(1) How much money a company has
(2) How much money a company owes
(3) How much the company is worth (value
of company)
Follows the accounting equation

Assets = Liabilities + Owner’s Equity
1. Company
Name
Balance Sheet
Date
1. Company
Name
Balance Sheet
Date
2. Total Assets –
how much you
have
1. Company
Name
Balance Sheet
Date
3. Total Liabilities –
how much you
owe
2. Total Assets –
how much you
have
1. Company
Name
Balance Sheet
Date
3. Total Liabilities –
how much you
owe
2. Total Assets –
how much you
have
4. Owner’s Equity–
how much you are
worth
You make $400 (after taxes) and
you owe $275 in bills. What is
your worth?
$400 (asset) - $275 (liability)=
$125 (worth)
 What is an Income Statement?
 A statement that shows a company’s
profit.
 How much was sold or made? (
revenue)
 How much was spent? (expense)
 How much is left over? (net
income/profit)
 Revenue – Expenses = Net Income/Loss
1. Company
Name
Income Statement
Date
1. Company
Name
Income Statement
Date
2. Total Revenue how much was
sold
1. Company
Name
Income Statement
Date
2. Total Revenue how much was
sold
3. Total Expenses how much was
spent
1. Company
Name
Income Statement
Date
2. Total Revenue how much was
sold
3. Total Expenses how much was
spent
4. Net
Income/Loss- how
much profit
 You have $5000 in sales
 Your company had $1200 in expenses
 Did you have a Net Income or Loss?
What was the amount?
 Revenue $5000 – Expenses $1200 = Net
Income $3800
 What
accounts would you find listed on the
balance sheet?
 Assets
 Liabilities
 Owner’s
Equity
 What
is the term used for how much you owe?
 Liability
 How
do you calculate how much you are worth?
 Assets
– Liabilities = Owner’s Equity (worth)
 What
financial statement shows how much profit
you made and how is this calculated?
 Income
Statement
 Revenue - Expenses
LESSON 1-3
How Transactions Change
Owner’s Equity in an
Accounting Equation
39
page 14
REVENUE TRANSACTIONS
Transaction 6 August 12. Received cash from sales, $295.00.
Transaction 7 August 12. Sold services on account to Oakdale
School, $350.00.
LESSON
1-3
40
page 15
EXPENSE TRANSACTIONS
Transaction 8 August 12. Paid cash for rent, $300.00.
Transaction 9 August 12. Paid cash for telephone bill, $40.00.
LESSON
1-3
41
page 16
OTHER CASH TRANSACTIONS
Transaction 10 August 12. Received cash on account from
Oakdale School, $200.00.
Transaction 11 August 12. Paid cash to owner for personal use,
$125.00.
LESSON 1-3
42
page 17
TERMS REVIEW
 revenue
 sale
on account
 expense
 withdrawals
LESSON 1-3