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The Accounting Cycle: Slide 5.1

The document describes the 8 steps in the accounting cycle: 1) Analyze transactions, 2) Journalize transactions, 3) Post journal entries, 4) Prepare working trial balance, 5) Adjust the general ledger accounts, 6) Prepare financial statements, 7) Journalize and post closing entries, 8) Prepare post-closing trial balance. The accounting cycle ensures accurate financial statements by requiring businesses to analyze transactions, record journal entries, prepare adjustments, and close out temporary accounts at the end of each accounting period.

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6 views22 pages

The Accounting Cycle: Slide 5.1

The document describes the 8 steps in the accounting cycle: 1) Analyze transactions, 2) Journalize transactions, 3) Post journal entries, 4) Prepare working trial balance, 5) Adjust the general ledger accounts, 6) Prepare financial statements, 7) Journalize and post closing entries, 8) Prepare post-closing trial balance. The accounting cycle ensures accurate financial statements by requiring businesses to analyze transactions, record journal entries, prepare adjustments, and close out temporary accounts at the end of each accounting period.

Uploaded by

arshad m
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Chapter 5

The Accounting Cycle

Slide 5.1
Chapter 5 Learning
Objectives
Identify the major steps in the accounting cycle.
Develop period-ending adjustments to general
ledger account balances.
Prepare an income statement, a statement of
stockholders’ equity, and a balance sheet.
Journalize and post closing entries.
Prepare a post-closing trial balance.

Slide 5.2
The Accounting Cycle . . .

. . . the set of recurring


accounting procedures that
must be completed for a
business each accounting
period.

Slide 5.3
The Accounting Cycle

1. Analyze transactions
2. Journalize transactions
3. Post journal entries
4. Prepare working trial balance
5. Adjust the general ledger accounts
6. Prepare financial statements
7. Journalize and post closing entries
8. Prepare post-closing trial balance

Slide 5.4
Analyzing transactions is the
starting point of the accounting
cycle.

Most of the information needed to


analyze transactions and to develop
journal entries is drawn from source
documents.

Slide 5.5
Examples of source
documents . . .
Sales invoices
Legal contracts
Checks
Purchase orders
Receiving reports
Bank statements

Slide 5.6
The “closing process” refers to the
final five steps of the accounting
cycle . . .
Prepare working trial balance
Adjust the general ledger accounts
Prepare financial statements
Journalize and post closing entries
Prepare post-closing trial balance

Slide 5.7
Remember that the
ultimate product of the
accounting cycle is a set
of financial statements . .
.
. . . that contain data needed
by decision makers.

Slide 5.8
Accounting Cycle, Step 1:
Analyze Transactions
1. Identify the accounts affected by a
transaction.
2. Identify the type of each account
affected by the transaction (asset,
liability, etc.).
3. Determine whether the transaction
increased or decreased the balance
of each account.
4. Record the increases or decreases
with . . . debits and credits.

Slide 5.9
Next . . .

Accounting Cycle, Step 2:


Journalize Transactions
Accounting Cycle, Step 3: Post
Journal Entries
Accounting Cycle, Step 4: Prepare
a Working Trial Balance

Slide 5.10
Accounting Cycle, Step 5:
Adjust the General Ledger
Accounts
A business must “fine tune”
its account balances at
the end of an accounting
period.
Why? To properly apply
the revenue and expense
recognition rules
(Chapter 2).

Slide 5.11
Four types of adjusting journal
entries . . .

Recognition of expenses related to


assets
Recognition of revenues related to
liabilities
Recognition of expenses incurred
but not yet paid
Recognition of revenues earned
but not yet received

Slide 5.12
Type of adjusting entry:
recognition of expenses related
to assets
Example: adjusting entry to
recognize expired portion
of prepaid rent
Basic form: debit expense
(Rent Expense), credit asset
(Prepaid Rent)
Note: Prepaid Rent is a
deferred expense account

Slide 5.13
Type of adjusting entry:
recognition of revenues related
to liabilities
Example: adjusting entry to
recognize revenue for advance
customer payments that have been
earned by the end of an
accounting period
Basic form: debit liability
(Unearned Revenue), credit
revenue (Fee Revenue)
Note: Unearned Revenue is a
deferred revenue account

Slide 5.14
Type of adjusting entry:
recognition of expenses
incurred but not yet paid
Example: adjusting entry to
record salaries owed to
employees at the end of an
accounting period
Basic form: debit expense
(Salaries Expense), credit
liability (Salaries Payable)
Note: Salaries Payable is an
accrued liability account

Slide 5.15
Type of adjusting entry:
recognition of revenues earned
but not yet received
Example: adjusting entry to
record interest revenue earned
during an accounting period
Basic form: debit asset (Interest
Receivable), credit revenue
(Interest Revenue)
Note: Interest Receivable is an
accrued revenue account

Slide 5.16
Accounting Cycle, Step 6:
Prepare Financial Statements

Once a business’s
accounts have been
adjusted, then the
firm’s income
statement, statement of
stockholders’ equity,
and balance sheet can
be prepared from the
adjusted trial balance.

Slide 5.17
Many companies prepare their
financial statements electronically
after completing the adjustment
process.
Many large companies
electronically deliver their
financial statements to
decision makers via
EDGAR.

Slide 5.18
Accounting Cycle, Step 7:
Journalize and Post
Closing Entries
To assist in closing their accounts,
many companies use an
Income Summary account.
The balances of revenue and
expense accounts are funneled
into the Income Summary
account, which is then closed
to Retained Earnings.

Slide 5.19
Four closing entries . . .

Transfer credit balances of income


statement accounts to Income
Summary
Transfer debit balances of income
statement accounts to Income
Summary account
Transfer balance of Income Summary to
Retained Earnings
Transfer balance of Dividends account
to Retained Earnings

Slide 5.20
Accounting Cycle, Step 8:
Prepare Post-closing Trial
Balance

A post-closing trial balance is


prepared to ensure that the
accounts are in balance upon
completion of the accounting
cycle.

Slide 5.21
Using a Work Sheet in the
Closing Process (Appendix)

Accountants may use a work sheet to help


them close a business’s accounting
records--particularly in a manual
accounting system.
Exhibit 5.17 presents a completed work
sheet.
Once a work sheet is completed, the
necessary information is available to
prepare the income statement, statement
of stockholders’ equity, and balance
sheet.
A completed work sheet also contains the
information needed to prepare period-
ending adjusting entries.

Slide 5.22

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