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Steps in Accounting Cycle

<< Rules of Debit and Credit
Preparing Balance Sheet from Trial Balance >>
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Financial Statement Analysis-FIN621
VU
Lesson-4
ACCOUNTING CYCLE/PROCESS
(Continued)
ACCOUNTING CYCLE/PROCESS
It mainly consists of Recording, Classifying and Summarizing financial transactions over an accounting
period.
Steps in Accounting Cycle
a)
Analyzing financial transaction. The purpose is to see which two (or more) Accounts
(or sub-Accounts) are affected by a particular financial transaction.
b)
Recording (chronologically) in journal which is called "book of original entry".
this step is also called journalizing. Its practical illustration is given below.
c)
Posting in ledger which means transferring debits and credits from journal to
ledger account. This is also called ledgerising or classification.
d)
Preparing trial balance, this is done to prove the equality of debits and credits  in the
ledger
e)
Making adjusting Entries
Compound Entry. A journal entry that has more than one debit or credit entry.
General Journal
Date
Account Title and explanation
LP
Dr.
Cr.
Cash
1
180,000
Khizr, Capital
50
180,000
July, 2006 (1)
(Owner invested cash in business)
Building
36,000
Cash
15,000
July, 2006 (5)
Accounts payable
21,000
(Purchase building partly for cash and
Partly on credit)
"LP" is reference account No: of the particular ledger accounts. For example cash account has been
assigned number 1 in ledger and capital account is given number 50.
C) Posting in ledger which mean transferring debits and credits from journal to ledger account. This is
also called ledgerising or classification
Date
Explanation
Ref
Dr.
Cr.
1-Jul
1
180,000
Khizr
1
Capital
Account No:50
1-Jul
180,000
"Ref" is reference to the page of journal i.e. page 1. This shows that there is cross-reference between
journal and ledger through "LP" and "ref" columns in journal and ledger respectively.
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Financial Statement Analysis-FIN621
VU
Cash Ledger Account
Date
Particulars
L/F
Debit
Date
Particulars L/F
Credit
1stJuly
Owners
180,000 3rd
Land
141,000
July
Equity
Accounts
5th
July
20th July
1,500
Building
15,000
Receivables
31st
Jul
A/P
3,000
31st
July
Balance c/f
22,500
Total
181,500
Total
181,500
Building Account
Date
Particulars
L/F
Debit
Date
Particulars
L/F
Credit
5th July
Cash Account
15,000
5th July
A/P
21,000
31st
July
Balance c/f
36,000
Total
36,000
Total
36,000
Office Equipment Account
Date
Particulars
L/F
Debit
Date
Particulars
L/F
Credit
14-Jul
A/P
5,400
31st
July
Balance c/f
5,400
Total
5,400
Total
5,400
Accounts Payable
Date
Particulars
L/F
Debit
Date
Particulars
L/F
Credit
31st July
Cash
3,000
5thJul
Building
21,000
14th
Equipment
5,400
July
31st July
Balance c/f
23,400
Total
26,400
Total
26,400
Land Account
Date
Particulars
L/F
Debit
Date
Particulars
L/F
Credit
3rd July
Cash
141,000  10th
A/R
11,000
July
31st
July
Balance c/f
130,000
Total
141,000
Total
141,000
Accounts Receivable
Date
Particulars
L/F
Debit
Date
Particulars
L/F
Credit
10th July
Land
11,000
20th
Cash
1,500
July
31st
Balance c/f
9,500
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Financial Statement Analysis-FIN621
VU
July
Total
11,000
Total
11,000
Owner's Equity Account
Date
Particulars
L/F
Debit
Date
Particulars
L/F
Credit
1st
Cash
180,000
July
31st July
Balance c/f
180,000
Total
180,000
Total
180,000
d) Preparing Trial balance:
This is done to prove the equality of debits and credits in the ledger.
KHIZR PROPERTY DEALER
TRIAL BALANCE
JULY 31, 2006
Dr.
Cr.
Rs.
Rs.
Cash
22,500
Accounts Receivable
9,500
Land
130,000
Building
36,000
Office Equipment
5,400
Accounts Payable
23,400
Khizr ,capital (Owner's equity)
180,000
203,400
203,400
It is prepared in the order of Accounting Equation i.e. balance sheet. It serves as a working paper for
accountants. It should however be noted that it gives assurance only as to equality of debit and credit
amounts. It does not assure accuracy. For example if a transaction is altogether omitted from accounting
records, debits and credits of other transactions so recorded would be equal, but this particular
transaction which was omitted altogether, would not be detected by Trial balance.
·
At the end of accounting period, a list of all ledger balances is prepared. This list is called trial
Balance.
Trial balance is a listing of the accounts in your general ledger and their balances as of a specified date.
A trial balance is usually prepared at the end of an accounting period and is used to see if additional
adjustments are required to any of the balances. Since the basic accounting system relies on double-
entry bookkeeping, a trial balance will have the same total debit amount as it has total credit amounts.
·
Both sides of trial balance i.e. Debit side and credit side must be equal. If both sides are not
equal, there are some errors in the books of accounts.
·
Trial balance shows the mathematical accuracy of the books of accounts.
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Financial Statement Analysis-FIN621
VU
Limitations of Trial Balance
1. Trial balance only shows the mathematical accuracy of the accounts.
2. If both sides of trial balance are equal, books of accounts are considered to be correct. But this
might not be true in all the cases.
3. If any transaction is not recorded at all, trial balance can not detect the omitted transaction.
·  If any transaction is recorded in the wrong head e.g. if an expense is debited to an
assets account. Trial balance will not be able to detect that mistake too
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Table of Contents:
  1. ACCOUNTING & ACCOUNTING PRINCIPLES
  2. Dual Aspect of Transactions
  3. Rules of Debit and Credit
  4. Steps in Accounting Cycle
  5. Preparing Balance Sheet from Trial Balance
  6. Business transactions
  7. Adjusting Entry to record Expenses on Fixed Assets
  8. Preparing Financial Statements
  9. Closing entries in Accounting Cycle
  10. Income Statement
  11. Balance Sheet
  12. Cash Flow Statement
  13. Preparing Cash Flows
  14. Additional Information (AI)
  15. Cash flow from Operating Activities
  16. Operating Activities’ portion of cash flow statement
  17. Cash flow from financing Activities
  18. Notes to Financial Statements
  19. Charging Costs of Inventory to Income Statement
  20. First-in-First - out (FIFO), Last-in-First-Out (LIFO)
  21. Depreciation Accounting Policies
  22. Accelerated-Depreciation method
  23. Auditor’s Report, Opinion, Certificate
  24. Management Discussion & Analyses (MD&A)
  25. TYPES OF BUSINESS ORGANIZATIONS
  26. Incorporation of business
  27. Authorized Share Capital, Issued Share Capital
  28. Book Values of equity, share
  29. SUMMARY
  30. SUMMARY
  31. Analysis of income statement and balance sheet:
  32. COMMON –SIZE AND INDEX ANALYSIS
  33. ANALYSIS BY RATIOS
  34. ACTIVITY RATIOS
  35. Liquidity of Receivables
  36. LEVERAGE, DEBT RATIOS
  37. PROFITABILITY RATIOS
  38. Analysis by Preferred Stockholders
  39. Efficiency of operating cycle, process
  40. STOCKHOLDERS’ EQUITY SECTION OF THE BALANCE SHEET 1
  41. STOCKHOLDERS’ EQUITY SECTION OF THE BALANCE SHEET 2
  42. BALANCE SHEET AND INCOME STATEMENT RATIOS
  43. Financial Consultation Case Study
  44. ANALYSIS OF BALANCE SHEET & INCOME STATEMENT
  45. SUMMARY OF FINDGINS