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ACCOUNTING CYCLE

LEARNING OUTCOMES
At the end of the session, students are able to: Identify the accounting cycle in recording process, Balancing off ledger accounts, and Prepare a Trial Balance.

ACCOUNTING CYCLE
In practice a more efficient and orderly system is used in recording daily business transaction. The basic steps in the recording process constitute the accounting cycle.

ACCOUNTING CYCLE
(1) Business transactions (2) Recorded in journals

(3) Posted to ledger accounts


(4) Trial Balance (5) Financial Statements Income Statement Balance Sheet 4

(2) JOURNAL
Also known as a book of original entry. The journal is like a diary where daily business transactions are recorded in order of date (chronological order). There are various types of journals but the most basic form is known as general journal.
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ILLUSTRATION OF JOURNAL ENTRIES


General Journal Date April 1 Cash Capital (Owner invested cash into business) J1 Folio 12 42 Debit (RM) 35,000 35,000 Credit (RM) Account Titles and Explanation

BersihMurni Services

ADVANTAGES OF JOURNAL
Based on double entry system, each transaction affects at least 2 (two) accounts. Therefore, the 2 (two) accounts are easily identified and linked through the journal entry because each journal entry shows the complete effect (debit and credit entries) in one place.
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(3) LEDGER
Journal entries must be posted to the appropriate accounts in the ledger. Posting refers to procedure of transferring information from the journal to the ledger accounts. Individual ledger accounts will indicate the position of a particular item.
How much cash balance. How much amount owing to creditor.
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ILLUSTRATION OF LEDGER ACCOUNTS


General Ledger Date Details Folio Amt (RM) Date Details Folio Amt (RM) No.12

Cash Account
1 April Capital J1 35,000 No.42 Capital Account April 1 Cash J1 35,000

BALANCING THE LEDGER ACCOUNTS


Cash Account RM Sept 1 Capital 15 Bank Loan 20 Service fees 50,000 20,000 4,300 Sept 4 Furniture 9 Motorcar 12 Supplies 19 Drawings 29 Salaries 30 Balance c/d 74,300 RM 10,400 35,600 1,300 1,200 3,800 22,000 74,300

Oct 1 Balance b/d

22,000

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NORMAL BALANCE OF AN ACCOUNT


Total Debit > Total Credit = Debit balance Total Credit > Total Debit = Credit balance The balance of an account normally corresponds to the nature of the account. It is a good practice to observe the balances of all the ledger accounts that you have balanced as to ensure that they are error free.
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NORMAL BALANCE OF AN ACCOUNT


DEBIT BALANCE Assets Expenses Drawings CREDIT BALANCE Liabilities Revenues Capital

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CHART OF ACCOUNTS
To keep track of accounts, most businesses have a chart of accounts. It lists all the accounts and their account numbers. The account numbers assigned to each account are used to identify and locate each account in the ledger. It is much more easier and faster for having numbering system.
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CHART OF ACCOUNTS
100 Assets 101 Cash 102 Debtors 103 Stock 104 Motor vehicle 105 Office equipment 400 Revenues 401 Service revenues 402 Sales 500 Expenses 501 Supplies 502 Salaries 503 Rent 504 Water and electricity 200 Liabilities 201 Creditors 202 Loan 300 Owners equity 301 Capital 302 Drawings

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(4) TRIAL BALANCE


A trial balance is a list of all the ledger accounts balances. It is prepared at the end of the accounting period before we prepare the financial statements. Purpose, to test the accuracy of the ledger by showing whether the total debits equal total credits.
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TRIAL BALANCE
BersihMurni Services Trial Balance as at 31 July 2010 Debit (RM) Cash Cleaning equipment Motor vehicle 9,650 26,000 30,000 Credit (RM)

Bank loan
Cuci Enterprise Capital Drawings Cleaning supplies Salaries Cleaning service revenue 73,450 2,500 2,100 3,200

30,000
2,000 35,000

6,450 73,450

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ERRORS OF TRIAL BALANCE


AFFECTED ERRORS: Incorrect addition Incorrect listing of account balances Mistake in calculating account balances Posting only one entry of journal to ledger Posting different amounts on both sides of ledger UNAFFECTED ERRORS: Transaction not journalise at all A correct journal entry is not posted Incorrect amount are used in journalising Incorrect amount are entered on both sides of the ledger Posting to the correct amount but wrong sides of the ledger Compensating errors whereby 2 errors offset each other.

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EXERCISES
Bengkel Motor Atan began operation on 1 July 2010 with RM20,000 cash as capital. The following are the transactions that took place for the first month of business. Date Transaction

July 2 Deposited RM10,000 cash into the bank.


3 Bought equipment for RM8,200 cash. 4 Bought auto parts and supplies from Zura Trading on credit RM4,700. 6 Performed services on cars for RM1,500 cash. 8 Paid rental of garage by cheque RM540. 12 Paid wages in cash RM800.

20 Paid electricity in cash RM250.


26 Paid Zura Trading RM1,500 by cheque. 27 Performed services on cars for RM7,500 cash
Required: a) b) c) Record the above transactions in the general journal. Post the journal entries to the relevant accounts in the ledger and balance off all the accounts. Extract a trial balance as at 31 July 2010.

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EXERCISES
Eusoffe Trading

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