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MODULE 2.pptx

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Buvanesh Chandrasekaran

The accounting cycle is an 8-step process that begins when a transaction occurs and ends with its inclusion in financial statements. The key steps include recording journal entries, posting to the general ledger, preparing an unadjusted trial balance, making adjusting entries, and creating financial statements. Most accounting software now automates the entire accounting cycle. The cycle revolves around accounting periods, with transactions recorded throughout and financial statements prepared at the end.

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MODULE 2
ACCOUNTING CYCLE The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company. It is a standard 8-step process that begins when a transaction occurs and ends with its inclusion in the financial statements. The key steps in the eight-step accounting cycle include recording journal entries, posting to the general ledger, calculating trial balances, making adjusting entries, and creating financial statements.
How the Accounting Cycle Works The accounting cycle is a methodical set of rules to ensure the accuracy and conformity of financial statements. Computerized accounting systems and the uniform process of the accounting cycle have helped to reduce mathematical errors. Today, most software fully automates the accounting cycle, which results in less human effort and errors associated with manual processing.
Steps of the Accounting Cycle Identify Transactions: An organization begins its accounting cycle with the identification of those transactions that comprise a bookkeeping event. This could be a sale, refund, payment to a vendor, and so on. Record Transactions in a Journal: ext come recording of transactions using journal entries. The entries are based on the receipt of an invoice, recognition of a sale, or completion of other economic events.
Posting Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The general ledger provides a breakdown of all accounting activities by account. Unadjusted Trial Balance: After the company posts journal entries to individual general ledger accounts, an unadjusted trial balance is prepared. The trial balance ensures that total debits equal the total credits in the financial records
Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet is created and used to ensure that debits and credits are equal. If there are discrepancies then adjustments will need to be made. Adjusting Journal Entries: At the end of the period, adjusting entries are made. These are the result of corrections made on the worksheet and the results from the passage of time. For example, an adjusting entry may accrue interest revenue that has been earned based on the passage of time.
Financial Statements: Upon the posting of adjusting entries, a company prepares an adjusted trial balance followed by the actual formalized financial statements. Closing the Books: An entity finalizes temporary accounts, revenues, and expenses, at the end of the period using closing entries. These closing entries include transfering net income into retained earnings. Finally, a company prepares the post-closing trial balance to ensure debits and credits match and the cycle can begin anew.
Timing of the Accounting Cycle The accounting cycle is started and completed within an accounting period, the time in which financial statements are prepared. Accounting periods vary and depend on different factors; however, the most common type of accounting period is the annual period. During the accounting cycle, many transactions occur and are recorded. At the end of the year, financial statements are generally prepared, which are often required by regulation. Public entities are required to submit financial statements by certain dates. Therefore, their accounting cycle revolves around reporting requirement dates.
KEY INFORMATION The accounting cycle is a process designed to make financial accounting of business activities easier for business owners. The first step in the eight-step accounting cycle is to record transactions using journal entries, ending with the eighth step of closing the books after preparing financial statements. The accounting cycle generally comprises a year or other accounting period. Accounting software today mostly automates the accounting cycle.
Classification of accounts based on accounting equation (modern classification) This classification also known as modern classification is based on the nature of accounts. Broadly speaking, there are mainly three types of accounts which are discussed below one by one. Assets : These accounts are related to all types of assets whether tangible or intangible. Example, Land and building, plant and machinery, furniture and fixture, all current assets such as cash, bank, Stock debtor, Bills receivable, goodwill, patents accounts, etc. Liabilities: These refer to such accounts, which create obligations for the business from the outsiders. Such as creditors, bills payable long term loans in the form of debentures and outstanding liablities
Capital: These refers to such accounts, which are for the propritor of the business, example is cash/ goods brought in as capital and drawings etc. As the capital is affected by expenses and profits, there will be two more types of accounts as part of capital. Expenses: Expenses refer to such accounts which show the amount which is incurred / spent or lost n the process of earning revenues, for example, purchase account, wages account, discount allowed, interest paid/payable, rent paid/ payable, goods lost in fire etc. Incomes or gains: Incomes refer to such accounts which are brought in by way of goods or rendering of services by the business, for exa,ple, sales discount received, royalty, interest received, dividend received etc
The following are the rules for debit and credit Assets Increase in assets Debit Decrease in assets Credit Capital Increase in capital Credit Decrease in capital Debit Liabilities Decrease in liability Debit Increase in Liablity Credit Revenue Income Decrease in revenue Debit Increase in revenue Credit Expenses Increase in expenses Debit Decrease in expenses credit
Significance of the rule of debit and credit A debit balance always tells one of the following: The following asset are owned by the business The following amounts have been incurred /spent by the business. The following persons are the debtor of the business or they owe this much to the firm. whereas a credit balance will always show that, The firm has earned this much. The firm owes this much to the outsiders.
MODULE 2.pptx

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MODULE 2.pptx

  • 2. ACCOUNTING CYCLE The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company. It is a standard 8-step process that begins when a transaction occurs and ends with its inclusion in the financial statements. The key steps in the eight-step accounting cycle include recording journal entries, posting to the general ledger, calculating trial balances, making adjusting entries, and creating financial statements.
  • 3. How the Accounting Cycle Works The accounting cycle is a methodical set of rules to ensure the accuracy and conformity of financial statements. Computerized accounting systems and the uniform process of the accounting cycle have helped to reduce mathematical errors. Today, most software fully automates the accounting cycle, which results in less human effort and errors associated with manual processing.
  • 4. Steps of the Accounting Cycle Identify Transactions: An organization begins its accounting cycle with the identification of those transactions that comprise a bookkeeping event. This could be a sale, refund, payment to a vendor, and so on. Record Transactions in a Journal: ext come recording of transactions using journal entries. The entries are based on the receipt of an invoice, recognition of a sale, or completion of other economic events.
  • 5. Posting Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The general ledger provides a breakdown of all accounting activities by account. Unadjusted Trial Balance: After the company posts journal entries to individual general ledger accounts, an unadjusted trial balance is prepared. The trial balance ensures that total debits equal the total credits in the financial records
  • 6. Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet is created and used to ensure that debits and credits are equal. If there are discrepancies then adjustments will need to be made. Adjusting Journal Entries: At the end of the period, adjusting entries are made. These are the result of corrections made on the worksheet and the results from the passage of time. For example, an adjusting entry may accrue interest revenue that has been earned based on the passage of time.
  • 7. Financial Statements: Upon the posting of adjusting entries, a company prepares an adjusted trial balance followed by the actual formalized financial statements. Closing the Books: An entity finalizes temporary accounts, revenues, and expenses, at the end of the period using closing entries. These closing entries include transfering net income into retained earnings. Finally, a company prepares the post-closing trial balance to ensure debits and credits match and the cycle can begin anew.
  • 8. Timing of the Accounting Cycle The accounting cycle is started and completed within an accounting period, the time in which financial statements are prepared. Accounting periods vary and depend on different factors; however, the most common type of accounting period is the annual period. During the accounting cycle, many transactions occur and are recorded. At the end of the year, financial statements are generally prepared, which are often required by regulation. Public entities are required to submit financial statements by certain dates. Therefore, their accounting cycle revolves around reporting requirement dates.
  • 9. KEY INFORMATION The accounting cycle is a process designed to make financial accounting of business activities easier for business owners. The first step in the eight-step accounting cycle is to record transactions using journal entries, ending with the eighth step of closing the books after preparing financial statements. The accounting cycle generally comprises a year or other accounting period. Accounting software today mostly automates the accounting cycle.
  • 10. Classification of accounts based on accounting equation (modern classification) This classification also known as modern classification is based on the nature of accounts. Broadly speaking, there are mainly three types of accounts which are discussed below one by one. Assets : These accounts are related to all types of assets whether tangible or intangible. Example, Land and building, plant and machinery, furniture and fixture, all current assets such as cash, bank, Stock debtor, Bills receivable, goodwill, patents accounts, etc. Liabilities: These refer to such accounts, which create obligations for the business from the outsiders. Such as creditors, bills payable long term loans in the form of debentures and outstanding liablities
  • 11. Capital: These refers to such accounts, which are for the propritor of the business, example is cash/ goods brought in as capital and drawings etc. As the capital is affected by expenses and profits, there will be two more types of accounts as part of capital. Expenses: Expenses refer to such accounts which show the amount which is incurred / spent or lost n the process of earning revenues, for example, purchase account, wages account, discount allowed, interest paid/payable, rent paid/ payable, goods lost in fire etc. Incomes or gains: Incomes refer to such accounts which are brought in by way of goods or rendering of services by the business, for exa,ple, sales discount received, royalty, interest received, dividend received etc
  • 12. The following are the rules for debit and credit Assets Increase in assets Debit Decrease in assets Credit Capital Increase in capital Credit Decrease in capital Debit Liabilities Decrease in liability Debit Increase in Liablity Credit Revenue Income Decrease in revenue Debit Increase in revenue Credit Expenses Increase in expenses Debit Decrease in expenses credit
  • 13. Significance of the rule of debit and credit A debit balance always tells one of the following: The following asset are owned by the business The following amounts have been incurred /spent by the business. The following persons are the debtor of the business or they owe this much to the firm. whereas a credit balance will always show that, The firm has earned this much. The firm owes this much to the outsiders.