Accounting Cycle Lecture Notes

Overview of Today's Class

• Focus on the accounting cycle.
• Important to have paper and pen to practice questions during class.
• Practice is crucial for mastering the material.

Review of Basic Concepts

• Five Key Accounting Terms:

  • Assets: What you own.
  • Liabilities: What you owe.
  • Equity: Difference between assets and liabilities.
  • Revenue: Earnings from providing goods or services.
  • Expenses: Costs incurred in providing goods or services.

• Accounting Equation:

  • Assets = Liabilities + Equity

• Financial Statements Order:

  1. Income Statement: Revenue - Expenses = Net Income
  2. Statement of Owner's Equity: Includes opening balance, investments, and withdrawals.
  3. Balance Sheet: Assets = Liabilities + Owner's Equity

T-Accounts and Posting

• T-Accounts: Visual representation of accounts.
• Ending Balance Calculation:
  • Draw a line under the last number, total both sides, and determine which side has the final balance.

Trial Balance

• Purpose of Trial Balance: Quick check to ensure that T-accounts balance before financial statements are prepared.
• Not a formal financial statement; it summarizes all final balances from T-accounts.
• Each account appears once—either on the debit or credit side.

Accounting Process Steps

1. Transactions: Record all business transactions.
2. Journalizing: Write entries in the general journal.
3. Posting: Transfer entries from the journal to the general ledger using T-accounts.
4. Footing T-Accounts: Calculate final balances for each account.
5. Prepare Trial Balance: Verify that debits equal credits.
6. Prepare Financial Statements:
   • Income Statement
   • Statement of Owner's Equity
   • Balance Sheet

Example Transactions

1. Investment in Business:

   • Cash: +$35,000 (Debit)
   • Land: +$50,000 (Debit)
   • Capital: +$85,000 (Credit)

2. Purchase of Equipment:

   • Equipment (Golf Mats): +$12,240 (Debit)
   • Cash: -$2,000 (Credit)
   • Accounts Payable: +$10,240 (Credit)

3. Contribution of Computer:

   • Computer: +$150 (Debit)
   • Capital: +$150 (Credit) (value of asset contributed)

4. Advertising Expense:

   • Advertising Expense: +$2,400 (Debit)
   • Accounts Payable: +$2,400 (Credit)

5. Revenue from Services:

   • Cash: +$100 (Debit)
   • Service Revenue: +$100 (Credit)

Final Steps in the Accounting Cycle

• After completing the T-accounts, prepare the trial balance to verify accuracy.
• Prepare financial statements in the specified order.
  • Income Statement
  • Statement of Owner's Equity
  • Balance Sheet

Key Reminders

• Ensure all transactions are recorded correctly and accounts are balanced before moving on to financial statements.
• Use trial balance to confirm all entries are accurate before preparing financial statements.
• Maintain clarity in labeling and structuring financial statements.