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Accounting Cycle

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Accounting Cycle
Account
An account is an individual accounting record of increases and decreases labeled as debits and credits.
There are separate accounts for each type such as assets, liabilities, owner’s equity, revenue and
expense account.
Rules on debit and credit
1. Assets increase by debit and decrease by credit
2. Liabilities increase by credit and decrease by debit
3. Owner’s Equities increase by credit and decrease by debit
4. Revenue increase by credit and decrease by debit
5. Expenses increase by debit and decrease by credit
Normal balance
It means whatever it takes to increase the account. If it takes a debit to increase the account such as
asset and expense, then the account has a normal debit balance. If it takes a credit to increase the
account such as liability, owner’s equity and revenue, then the account has a normal credit balance.
Account balance
Difference between total credits and total debits. If total debit exceeds total credits the account has a
debit account balance or debit balance. If total credits exceed total debits the account has credit
account balance or credit balance.
Accounting Cycle
The sequence of steps followed in the accounting process.
Steps in Accounting Cycle
1. Transactions are analyzed through source documents
Examples of source documents:
Sales invoice
Official receipt
Miscellaneous bills
Deposit slips and checks
Chart of accounts list of all account titles used in the accounting records and their corresponding
account numbers. The accounts are arranged in the order of five elements of financial statements.
Steps in analyzing transactions:
1. Determine specific accounts affected. (e.g. Rent expense, Cash, Accounts Payable etc.)
2. Determine what type of accounts affected. (Assets, Liabilities, Owner’s Equity, Revenue, Expenses)
3. Determine whether the affected accounts were increased or decreased.
4. Apply rules on debit and credit.
2. Transactions are journalized in a book of account called journal (book of original entry).
3. Journal entries are transferred from journal to another book of accounts called ledger (book of final
entry).
4. Preparation of trial balance

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5. The necessary adjusting entries are assembled.
6. Preparation of worksheet (optional step)
7. Preparation of financial statements from the worksheet
8. Based on worksheet, the adjusting entries are journalized and posted to the ledger.
9. Closing entries are journalized and posted to ledger.
10. A post closing trial balance is prepared.
11. Reversing entries are journalized and posted to ledger. (optional step)
Accounting Cycle: STEP 5 Necessary adjusting entries are assembled
Adjusting entries
Journal entries made at the end of the accounting period to update the balances of accounts.
Types of adjusting entries
1.) Depreciation - systematic allocation of the cost of property and equipment to expense over the
accounting period benefited by its use.
Straight line method: Annual depreciation = (Cost of Asset *Salvage Value)/Useful life
*Salvage Value/Residual Value/Scrap Value estimate of what an asset will be worth at the end of the
of its useful life
2.) Deferrals - there are two kinds of deferrals namely:
a. Deferred revenue/Unearned Revenue cash is received in advance but revenues are not yet earned
(service still not performed or goods still not delivered).
Accounting for unearned revenue:
Liability method total amount of cash received in advance is credited to a liability account.
Revenue method total amount of cash received in advance is credited to a revenue account.
b. Deferred expenses/Prepaid Expenses paid in advance but expenses are not yet incurred.
Accounting for prepaid expenses:
Asset Method prepaid expenses was originally recorded as an asset.
Expense method prepaid expenses was initially recorded as expenses.
3.) Accruals - there are two kinds of accruals namely:
a.) Accrued expenses/accrued liability expenses should be recognized in the period it was incurred
regardless when cash is paid.
b.) Accrued revenue/accrued assets revenue should be recognized earned when service is already
performed or goods were delivered regardless when cash is receive.
4.) Allowance for Bad Debts to be discussed in accounting for merchandising concern.
Completion of Accounting Cycle: Step 6 to Step 11
STEP 6: Preparation of worksheet (optional step)
Worksheet
working tool used to aid in the preparation of adjusting entries, closing entries and financial statements.
Steps in preparation of worksheet:
1.) Prepare a trial balance on the worksheet

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Accounting Cycle Account An account is an individual accounting record of increases and decreases labeled as debits and credits. There are separate accounts for each type such as assets, liabilities, owner’s equity, revenue and expense account. Rules on debit and credit 1. Assets increase by debit and decrease by credit 2. Liabilities increase by credit and decrease by debit 3. Owner’s Equities increase by credit and decrease by debit 4. Revenue increase by credit and decrease by debit 5. Expenses increase by debit and decrease by credit Normal balance It means whatever it takes to increase the account. If it takes a debit to increase the account such as asset and expense, then the account has a normal debit balance. If it takes a credit to increase the account such as liability, owner’s equity and revenue, then the account has a normal credit balance. Account balance Difference between total credits and total debits. If total debit exceeds total credits the account has a debit account balance or debit balance. If total credits exceed total debits the account has credit account balance or credit balance. Accounting Cycle The sequence of steps followed in t ...
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