Unit 4: The accounting cycle, Apuntes de Derecho

¡Descarga Unit 4: The accounting cycle y más Apuntes en PDF de Derecho solo en Docsity!

UNIT 4

THE ACCOUNTING

CYCLE

THE BUSINESS CYCLE

• (^) Business starts with cash and works hard to collect more of it.
• (^) They pay cash to buy goods and services, and they sell those

goods and services, receiving cash to complete the cycle.

The accounting cycle follows the business cycle to report on

the following facts about the entity:

• (^) Results of operations (Income statement)
• (^) Financial position (Balance sheet)
• (^) Cash flows (statement of Cash flows)

ACCRUAL BASIS ACCOUNTING



An accountant recognizes the impact of a business

transaction as it occurs

 When the business performs a service, makes a

sale, or incurs an expense, the accountant record

the transaction, whether or not cash has been

received or paid

ADJUSTING ENTRIES

Journal entries that are recorded in order

to properly reflect the appropriate

balances in the various ledger accounts

for a specific accounting period.

ACCRUALS

Unrecorded expenses or revenues

and their subsequent adjusting

entries

• (^) The december 2013 rent is due to be paid at the

beginning of the month (500€). The business fails to

pay the rent by december 31, which is the end of the

accounting period.

• 1st december. A customer borrowed 1000€, giving

the co a ninety-day promissory note that called for

interest at the annual rate of 8%. The interest income

of the note will not be received until it is due.

o The terms of one-year lease on the premises that was

signed and became effective on November 1st, 2013,

were: the annual rent is 6000€; it is to be paid in two

installments of 50% each. The first installment is due

November 1st, 2013.

o You receive a rent check from your tenant on

November 1, 2013. It is for 800€ and is payment of

four months rent beginning with november.

10

BREAKDOWN PROCESS OF THE “MERCHANDISE” ACCOUNT

• (^) (300) Merchandises: asset account used for the opening and closing

inventory.

• (^) (600) Merchandise Purchase : expense account. Purchases are

recorded at its purchase price.

• (^) (700) Merchandise Sold : income account. Sales are recorded at its

selling price.

CLOSING ENTRIES: 2) Closing temporary

accounts

 It involves transferring the balances of the temporary

accounts to the owner’s equity



Each temporary account must be either debited or credited

to eliminate its balance, while a corresponding debit or

credit is summarized in another temporary account

designed exclusively for that purpose: PROFIT AND LOSS,

INCOME SUMMARY or NET EARNINGS SUMMARY

CLOSING TEMPORARY ACCOUNTS

PROCESS

1) All revenue accounts are closed to the income summary account

2) All expense accounts are closed to the income summary account

3) After the closing entries have been journalized the only accounts that will have

balances in the ledger will be the assets, liabilities and owner’s equity accounts

4) This process takes place at the end of the accounting period, so that at the beginning

of the next accounting period we begin using new revenues and expenses accounts

again

STEPS IN THE ACCOUNTING CYCLE

1. Journalize daily business transactions

2. Post to the various ledger accounts

3. Calculate the ledger balances

4. Prepare a trial balance

5. Record the adjusting entries at the end of the accounting period

6. Journalize and post closing entries

7. Prepare financial statements