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A Review of the Accounting
Cycle
Chapter 2
Intermediate Accounting
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used herein under license.
Learning Objectives
1. Identify and explain the basic steps in the
accounting process (accounting cycle).
2. Analyze transactions and make and post
journal entries.
3. Make adjusting entries produce financial
statements, and close nominal accounts.
4. Distinguish between accrual and cash basis
accounting.
5. Discuss the importance and expanding role
of computers to the accounting process.
Double Entry Accounting
• Each transaction/
business event is
recorded to
maintain the
equality of:
The basic accounting equation
• The accepted
system for
recording
accounting data.
Assets = Liabilities + Owners’ Equity
Journalizing Transactions
• Transactions are events that have an
economic impact on a business.
• Business documents are records that
are evidence of transactions.
• A journal is an accounting record in
which business transactions are
entered in chronological order.
Journal Entry Process
Every journal entry involves a 3-step
process:
1. Identify the accounts involved with
an event or transaction.
2. Determine whether each account
increased or decreased.
3. Determine the amount by which
each account was affected.
Debits and Credits
• A debit is an entry on the left side of
an account.
• A credit is an entry on the right side.
General Journal Entry Format
Date
Debit Entry.................................. xx
Credit Entry.............................
xx
Explanation
• Debits and credits affect accounts
differently.
Types of Journals
• The general journal is used to record
all transactions.
• A special journal is used to record a
particular type of frequently recurring
transaction.
– Sales, Purchases, Cash Disbursements,
Cash Receipts
Posting to the Ledger Accounts
• Posting is the process of transferring
amounts from the journal to the
general ledger.
• A ledger is a collection 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.
Reporting Phase
4. A trial balance is prepared.
5. Adjusting entries are recorded.
6. Financial statements are
prepared.
7. Closing entries are made.
8. A post-closing trial balance is
prepared (optional).
Preparing a Trial Balance
Determine the account balance for
each T-Account.
• A trial balance is a list of all accounts
and their balances.
• It provides a means to assure that
debits equal credits.
•
Preparing Adjusting Entries
• Adjusting entries are required at the end
of each accounting period prior to
preparing the financial statements.
• The purpose for adjusting entries are to:
• bring balance sheet accounts
current.
• reflect proper amounts of revenues,
costs, and expenses on the income
statement.
Tips for Adjusting Entries

Adjusting entries always incorporate a
balance sheet account and an income
statement account.

Adjusting entries never involve a cash
account.

You can not memorize adjusting
entries.
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
1. Identify the original entries that were
made, if any.
•
Original entries are only made for
unearned revenues and prepaid
expenses.
2. Determine what the correct balances
should be at this point in time.
3. Make the adjustments needed to
bring the balances to the desired
amounts.
Perpetual Inventory System
When a perpetual
inventory system is
When
maintained,
a a sale takes
place, the sale is
separate Purchases
recorded
account is not
used. similar to
The cost of the
the periodic
merchandise is
inventory system.
recorded by a
debit to Cost of
Goods Sold and a
credit to
Inventory.
The Closing Process
•
Real accounts or permanent accounts
• Not closed to a zero balance at the end of the
accounting period.
• Carried forward to the next period.
•
Nominal accounts or temporary accounts
• Closed to a zero balance at the end of each
accounting period.
• All Income statement accounts & Dividend
Account.
•
Closing entries reduce all nominal accounts
to a zero balance.
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
1. Analyze transactions and business
documents.
2. Journalize transactions.
3. Post journal entries to accounts.
4. Determine account balances and
prepare a trial balance.
5. Journalize and post adjusting entries.
6. Prepare financial statements.
7. Journalize and post closing entries.
8. Prepare a post-closing trial balance.
Accrual Accounting
• Recognizes revenues as they are
earned, not necessarily when cash is
received.
• Recognizes expenses as they are
incurred, not necessarily when cash is
paid.
• Provides a better basis for financial
reports, according to the FASB.
Cash Basis Accounting
• Cash-basis accounting is focused on
cash receipts and cash disbursements.
• Typically used by service businesses,
such as CPAs, dentists, and engineers.
• AICPA holds that it is appropriate for
small companies.
Computers and Accounting
• Many steps of the accounting cycle
are performed using computers.
• Typical computerized functions
include, generating reports and
computational analysis.
• But it will never replace a good
accountant!