THE ACCOUNTING CYCLE

A DAC 501: FINANCIAL

ACCOUNTING PRESENTATION.
BY

HERICK ONDIGO
SCHOOL OF BUSINESS, UoN

The Accounting Cycle

For a new business, it begin by setting up ledger

accounts.
For an established business, begin with account
balances carried over from the previous period.

The Steps In The Accounting Cycle

Analyze source documents & record business
transactions in a journal
2. Post journal entries to the ledger accounts
3. Prepare unadjusted trial balance (TB)
4. Journalize and post end of period
adjustments (EOPA)
5. Prepare adjusted Trial Balance
6. Prepare /Create financial statements &
reports from data in adjusted TB
7. Journalize and post the closing entries
8. Prepare the post-closing trial balance
9. Prepare and post reversing entries
1.

Detailed Steps in the Accounting Cycle

Analyze
Business
Transactions
.

Journalize
transactions
in the
journal.

Post entries
to the
accounts in
the ledger.

Prepare
unadjusted
trial
balance.

Post-closing
trial balance

Journalize and
post closing
entries

Prepare
financial
statements.

Prepare
adjusted
trial
balance.

Journalize
and post
adjusting
entries

Analysis and Recording Business Transactions

Business transaction is an economic event that

causes a change in the financial position

Financial Position:

What the entity controls

How the entity controls them (claims)

Fundamental Accounting Equation

ASSETS = EQUITIES

ASSETS = LIABILITIES + OWNERS' EQUITY

How do we use the Accounting equation?

Recall the Basic Accounting Equation:
Assets = Liabilities + Shareholders Equity
Implications:
Total Asset=Claims against the assets
Therefore :
If assets increase : either Liabilities and/or

Shareholders should also increase and vice versa

For example: borrow cash, cash (asset) will
increase and Liabilities will increase
when it is paid back: cash (asset) will decrease
and liabilities will decrease

How do we record/Account?
An ACCOUNT (ledger Account) : is an

accounting device used to record changes in a

of a specific asset, liability or owners equity
item
Has 3 elements: title, debit side and credit side
(also called the T-Account)
Changes in the accounts are entered manually
into a book called a ledger or computerized
ledger
Basic forms of book ledgers: the two-column
account format, and the running format
account
Chart of accounts

Definition of Ledger Account

Ledger Account
Complete listing of business transactions for an individual
account
Where you look if you want to find the balance of any given
account
General Ledger
A loose-leaf book or computer file containing all the Ledger
Accounts
Each account from the chart of accounts has its own

ledger account in the general ledger

Complete listing of all account tittles and account
names/codes used by an entity is called the chart of
accounts - It is like a table of content in a book

Forms of Ledgers
Two-Column Account

T-Account form that depicts the two-column account:

How do accounts behave?

Assets = Liabilities + Shareholders Equity
+
+
+
So Assets increase on the left hand or debit side then
they decrease on the credit side

+
debit

Assets
credit

Behavior of Accounts cont

Liabilities and Owners Equity accounts increase
on the credit side, decrease on the debit side
Liabilities or Owners Equity Accounts
debit

+
credit

Transaction Analysis and The Duality Concept

Double entry system states that every

transactions affects at least two accounts.

Therefore
If an asset account increases (decreases),
because of duality concept there must be a
corresponding:
1. increase(decrease) in a specific liability
account
2. or a decrease(increase) in a another asset
account
3. or an increase(decrease) in owners' equity
account.

What Is a General Journal?

The book in which a person enters the original

record of a business transaction

Commonly referred to as a book of original entry

Chronological listing of all the business

transactions for the company

Each listing records the debits and credits associated with

that business transaction

A book or a location on a hard drive where all

business transactions are listed

Like a diary
Accounting Is Fun!

Whats in a Journal Entry?

Date
2. At least one debit entry
Debit account, use exact account title, do not indent titles
3. At least one credit entry
Credit account, use exact account title, indent titles
4. An explanation of the transaction:
Check number
Invoice number
Accounts receivable customer name
Many other elements OR details as appropriate
Remember: the accountant must leave a good audit trail
so that users of accounting information can understand
what occurred with each transaction
1.

DR=CR

Illustration of the accounting process

1. On Jan 1 2010 Ms.Farida invested $100,000 at the
inception of the business, Express Travel Agency

2. On 1 January employed a full time secretary and a

sales representative.

3. On 1 January rented an office building and paid 3 months rent of

$600.

4. On 2 January office furniture and equipment is purchased for

$ 15,000 , for which $ 5,000 is paid in cash and the rest would be
paid later in January and February 2010.

5. On 3 January insured the office building and the equipment

effective from 1 January to 31 December 2010 and paid $ 120 for
the whole period.
Event No
1
2
3
4
5
Total

Assets
Liabilities
Owners Equity
+100.000
No change
+100.000
No change
No change
No change
+600
No change
No change
-600
No change
No change
+15.000
+10.000
No change
-5.000
+120
No change
No change
-120
110.000
10.000
100.000

6. On 5 January the company signed an agreement with

Keya Airline to sell their airline tickets and receive
commissions in return.

7. On 10 January Express Travel Agency borrowed

$15,000 from the bank at an annual interest rate of
24% for six months. The principal and the interest of
the loan will be paid together on 10 July 2010.

7. On 10 January Express Travel Agency borrowed $

15,000 from the bank at an annual interest rate of
24% for six months. The principal and the interest of
the loan will be paid together on 10 July 2010.

8. On 10 January purchased office supplies for $2.500 in

cash.

8. On 10 January purchased office supplies for $2,500 in

cash.

9. During the first half of January the agency sold tickets to

various customers and on 16 January issued a
commission invoice to clients amounting to $5,000 that
will be collected later in January 2010.

9. During the first half of January the agency sold tickets to

various customers and on 16 January issued a
commission invoice to clients amounting to $ 5,000 that
will be collected later in January 2010.

10. On 20 January the company paid $5,000 for the

furniture and equipment that were purchased on 2 January.

10. On 20 January the company paid $5.000 for the

furniture and equipment that were purchased on 2 January.

11. On 22 January received $7,500 from a customer for organizing

the accounting conference that will be held on February 2, 2010.

11. On 22 January the company received $7.500 from a customer for

organizing the accounting conference that will be held on 2 February
2010.

12. The company received the full payment of commission

charged to Kenya Airlines of $ 5.000 on 23 January.

Event No

As s ets
1

+100.000

2
3

No change
+600
-600
+15.000
-5.000
+120
-120
No change
+15.000
+2.500
-2.500
+5.000
-5.000
+7.500
+5.000
-5.000
132.500

4
5
6
7
8
9
10
11
12
Total

Liabilities

Owners Equity

No change

+100.000

No change
No change
No change
+10.000

No
No
No
No

change
change
change
change

No change

No change

No change
+15.000
No change

No change
No change
No change

No change
-5.000
+7.500
No change

+5.000
No change
No change
No change

27.500

105.000

12. The company received the full payment of commission

charged to Kenya Airline s of $ 5,000 on 23 January.

13. On 24 January paid salaries of $ 9,000 employees in cash.

13. On 24 January paid salaries of $ 9,000 employees in cash.

14. During the second half of January the agency sold tickets to various
customers and on 31 January issued a commission invoice to Kenya
Airline amounting to $ 7,500 which will be collected in February 2010.

14. During the second half of January the agency sold tickets to
various customers and on 31 Jan sent an invoice to Kenya Airline
amounting to $7,500 which will be collected in February 2010

15. Ms. Farida ( the proprietor) withdrew $ 3,000

on 31 January for her personal use.

15. Ms. Farida withdrew $ 3.000 on 31 January for

personal use.

Summary of Journalizing
Steps:
1. Determine the effects of transactions on
three components of the accounting
equation,
2. Determine which specific accounts are
affected, and
3. Assure that total of the increases should
be equal to either increases on the other
side of the equation or to decreases on
the same side, or a combination there of.

Behavior of Accounts- Summary

Assets =
+ Dr Cr

Liabilities +
+
Dr
Cr

Owners Equity
+
Dr
Cr
Expense
Revenue
+
+
Dr Cr
Dr Cr

Withdrawals/Dividends
+
Dr
Cr

Accounting Cycle-Revisited

Analyze and
record the
transactions

Close the
accounts and
prepare trial
balance

Post the
transactions and
prepare trial
balance

Prepare the
financial
statements

Adjust the
accounts
and prepare
trial balance

Posting -Defined

The process of transferring figures

from the journal to the ledger accounts
It simply involves transferring data
from one accounting entry into another
The purpose is to classify and
summarize transactions and events
affecting specific elements of the
financial statements

Four-Step Posting Process

1. Transfer transaction date to accounts date column
2. Transfer the debit/credit amount and calculate the
3.
4.

new balance
Write journal page number in posting reference
column of ledger as a cross-reference
Go back to journal and write account number in
posting reference column of journal as a crossreference
Cross-reference
The ledger account number in the Post. Ref. column
of the journal and the journal page number in the
Post. Ref. column of the ledger account

Posting to The Ledger illustrated

Posting illustrated

Exercise
Post all the above transactions (journal entries)

to the following ledger accounts:

Prepaid Rent, Office supplies, Prepaid insurance, Office

Furniture & Equipment, Bank loan, Accounts Payable, Unearned
Revenue, Capital, Withdrawals, Commission Revenue, & Salary
Expense

Cast the ledger accounts

Determine the balances carried down (Bal c/d) and

balances brought down (b/d)

Prepare a summary of the ledger balances in a two
columnar listing to derive the Trial Balance( TB )

SUMMARY -Normal Balances of Accounts

Category of the Account

Increase Recorded
By

Normal Balance

Assets

Debits

Debit

Liabilities

Credits

Credit

Capital

Credits

Credit

Dividends or Withdrawals

Debits

Debit

Revenues

Credits

Credit

Expenses

Debits

Debit

Shareholders Equity

Preparing a Trial Balance

List the ledger account

balances in two columns on the

trial balance
Left column = Debits
Right column = Credits
Trial balance proves DR = CR

The Balancing of Accounts, The Trial Balance &

Financial statements
Introduction:

In the previous exercise , you have learned the principles

of double entry and how to post to the ledger accounts. The
next step in our progress towards the financial statements is
the trial balance.
Before transferring the relevant balances at the year end to
the financial statements, it is usual to test the accuracy of the
double entry bookkeeping records by preparing a trial
balance. This is done by taking all the balances on every
account. Due to the nature of double entry, the total of the
debit balances will be exactly equal to the total of the credit
balances.

The Balancing of Accounts & The Trial Balance

Question: Once you have closed all the accounts, what would
do?
Answer: Prepare a Trial Balance
Question: What is a Trial Balance then? What is it for?
How
does it look like?
Answer: A Trial Balance is a list of nominal ledger account
and their balances at a given date. It is usually
prepared on the last day of the accounting
period.
It consists of a Debit and a Credit balance.
Its purposes:
(1) It is prepared to check that the total of debit balances is the
same as the total of credit balances and offer reassurance that the
double entry recording from day books has been done correctly.
(2) For preparation of statement of income and the statement of
financial position

The Balancing of Accounts & The Trial Balance

The rules to prepare the Trial Balance:

Total Debit Entries = Total Credit Entries

Debit
Assets
Expenses
Drawings

Credit
Income/ Revenue
Liabilities
Capital

The Balancing of Accounts & The Trial Balance

Steps to preparing the Trial Balance:

1) Balance/cast ALL the ledger accounts in the books.
2) List all the Debit balances on the debit side and add them up.
3) List all the Credit balances on the credit side and add them
up.
4) Ideally the trial balance should balance after step 3

The Balancing of Accounts & The Trial Balance

What if the trial balance shows unequal debit and credit
balances?
If the columns of the trial balance are not equal, there must be
an error in recording or processing the transactions.
4 Errors revealed by the trial balance:
The errors revealed are those errors which cause the Trial
Balance totals to disagree. (i.e do not balance)
There are FOUR types of errors revealed by a trial balance:
1) Posting to the wrong side of an account.
2) Errors in calculation and balancing
3) Incorrect amounts entered on one entry
4) Omission of one entry.

The Balancing of Accounts & The Trial Balance

Question: How do we locate all of the above errors?

Answers: 1) Check day-book (journal) totals
2) Check additions of Ledger accounts, ensure
each balance is correct
3) Check all ledger account balances have been
recorded in the Trial Balance.
4) Check all balances have been entered in the
Trial Balance on the correct side.
5) Check additions have been done correctly

The Balancing of Accounts,& The Trial Balance

Question: Once you are sure there is no mistake made in the

Trial Balance, what do you do in the next step?
Answers: Prepare End of Period Adjustment & then prepare
the following statements:
1) Statement of Income
2) Statement of Financial Position
In short, these are the steps:
1) Trial Balance
2) End of Period Adjustments
3) Statement of Income
4) Statement of Financial position

The Balancing of Accounts & The Trial Balance

However, a trial balance will not disclose the following types
of errors: (Errors not revealed by the trial balance)
1) Errors of omission
Complete omission of a transaction, because neither a
debit nor a credit is made.
2) Errors of commission
This happens when original figure incorrectly
entered. (Correct double entries but incorrect amounts
were recorded)

The Balancing of Accounts & The Trial Balance

3) Compensating errors
This happens where errors cancel out each other. (eg an
error of 100 is exactly cancelled by another 100 error
elsewhere).
4) Errors of principles
This happens when the wrong type of account had been
used (eg the purchase of a motor van is debited to a
expense account, such as motor expenses, rather than a fixed
asset account)
5) Complete reversal of entries
This happens when an account should be debited but was
credited (and vice versa)

The Trial Balance

THE END

THANK YOU