In order to continue enjoying our site, we ask that you confirm your identity as a human. Thank you very much for your cooperation. The accounting cycle is performed during the accounting period, to analyze, record, classify, summarize, and report financial information. Identify and complete the 8 steps in the Accounting Cycle
All business transactions must be recorded to the proper journal by double-entry book keeping. Explain why the double entry system is used in accounting and the proper use of a T-account
The accounting requirement that each transaction be recorded by an entry that has equal debits and credits is called double-entry procedure. This double-entry procedure keeps the accounting equation in balance. For each business transaction recorded, the total dollar amount of debits must equal the total dollar amount of credits. If one account (or accounts) is debited for $100, then another account (or accounts) must be credited for the same amount. The general ledger of all accounts is, simply, a comprehensive collection of T-accounts -- so called because there is a vertical line in the middle of each ledger page and a horizontal line at the top of each ledger page, like a large letter T. The account title will appear above the horizontal line, and debits and credits will appear to the left and right of the vertical line, respectively. Some typical accounts and their normal balances: Assets Debit Contra Asset Credit Liability Credit Contra Liability Debit Owner's Equity Credit Stockholder's Equity Credit Revenue Credit Contra Revenue Debit Expenses Debit Gains Credit Losses Debit An account's normal balance will be the side on which increases are recorded. For example, assets and expenses normally have debit balances, and liabilities and revenues normally have credit balances. Continuing our example, how would we recognize and record the transactions involved in running our yoga studio? Pre-opening Prior to opening the business, you make the following transactions: 1. You contribute $4,000 in cash to start the business. Cash 4,000, Contributed Capital 4,000; Assets(+)=Equity(+) 2. You purchase $500 worth of mats and other equipment for use during classes.Cash -500, PPE 500; Assets(+), Assets(-)=0 3. You purchase an additional $400 worth of mats, equipment, and clothing for sale at the studio.Cash -400, Inventory 400; Assets(+), Assets(-)=0 4. You purchase liability insurance at a total cost of $1,200. The policy covers July 1 through December31.Cash -1,200, Prepaid Insurance 1,200; Assets(+), Assets(-) July The following transactions take place during July. 1. You receive cash totaling $800 for classes.Cash 800, Service Revenue 800; Assets(+)= Equity(+) 2. Your instructor teaches classes for the month. You agree to pay $600 for the classes; $300 is paid on July 15, and $300 will be paid on August 3.Cash -300, Wage Payable 300, Instructor Expense 600; Assets(-300)=Liabilities(+300)+Equity(-600) 3. You pay rent for July of $1,000 on July 1.Cash -1,000, Rent Expense 1,000; Assets(-)=Equity(-) 4. You use utilities (electricity and water) totaling $200. This amount is payable on August 15.Utility Payable 200, Utility Expense 200; Liability(+)+Equity(-)=0. August The following transactions take place during August. 1. You receive $1,500 in cash for classes on August 1. Of this amount, $1,000 is for an initiation fee. The remainder is for 2-month passes allowing unlimited classes in August and September.Cash 1,500, Unearned Revenue 500, Service Revenue 1,000; Assets(+1,500)=Liability(+500)+Equity(+1,000) 2. Your instructor again earns $600 teaching classes; $300 due on August 16 and $300 on September 1.Cash -300, Wage Payable 300, Instructor Expense 600; Assets(-300)=Liabilities(+300)+Equity(-600) 3. Utilities total $150, payable September 15.Utility Payable 150, Utility Expense 150; Liability(+)+Equity(-)=0 4. You pay rent of $1,000 on August 1.Cash -1,000, Rent Expense 1,000; Assets(-)=Equity(-) 5. You sell inventory costing $150 for a revenue of $225.a. Cash 225, Sales Revenue 225; Assets(+)=Equity(+) b. Inventory -150, Cost of Goods Sold 150; Assets(-)=Equity(-) 6. You are worried about money, so your Uncle Rafael makes you an offer. He agrees to loan you $2,000 in cash. You will need to repay him sometime later, but he doesn't say when.Cash 2,000, Loan Payable 2,000; Assets(+)=Liabilities(+) 7. A client is extremely dissatisfied with their class, and demands their money back. Reluctantly, you agree. The class cost $15.Cash -15, Service Revenue -15; Assets(-)=Equity(-) 8. After borrowing money, you decide to withdraw some of your investment in the studio to pursue other opportunities. You decide to withdraw $1,000.Cash -1,000, Contributed Capital -1,000; Assets(-)=Equity(-) Items are entered into the general journal or the special journals via journal entries, also called journalizing. Explain the correct procedure for making a journal entry in the General or Special Journal.
Consider our example for the yoga studio. How would we record journal entries for each transaction? Pre-opening Prior to opening the business, you make the following transactions: 1. You contribute $4,000 in cash to start the business. Cash 4,000 Contributed capital 4,000 2. You purchase $500 worth of mats and other equipment for use during classes.PPE 500 Cash 500 3. You purchase an additional $400 worth of mats, equipment, and clothing for sale at the studio.Inventory 400 Cash 400 4. You purchase liability insurance at a total cost of $1,200. The policy covers July 1 through December31.Prepaid insurance 1,200 Cash 1,200 July The following transactions take place during July. 1. You receive cash totaling $800 for classes.Cash 800 Revenue 800 2. Your instructor teaches classes for the month. You agree to pay $600 for the classes; $300 is paid on July 15, and $300 will be paid on August 3.Wage expense 600 Cash 300 Wage payable 300 3. You pay rent for July of $1,000 on July 1.Rent expense 1,000 Cash 1,000 4. You use utilities (electricity and water) totaling $200. This amount is payable on August 15.Utility expense 200 Utility payable 200 August The following transactions take place during August. 1. You receive $1,500 in cash for classes. Of this amount, $1,000 was for classes in August. The remainder is for 2-month passes allowing unlimited classes in August and September.Cash 1,500 Revenue 1,250 Unearned revenue 250 2. Your instructor again earns $600 teaching classes; $300 due on August 16 and $300 on September 1.Wage expense 600 Cash 300 Wage payable 300 3. Utilities total $150, payable September 15.Utility expense 150 Utility payable 150 4. You pay rent of $1,000 on August 1.Rent expense 1,000 Cash 1,000 5. You sell inventory costing $150 for a $225.Cash 225 Revenue 225 Cost of goods sold 150 Inventory 150 (these can be combined into a single entry if you choose. ) 6. You are worried about money, so your Uncle Rafael makes you an offer. He agrees to loan you $2,000 in cash. You will need to repay him sometime later, but he doesn't say when.Cash 2,000 Loan Payable 2,000 7. A client is extremely dissatisfied with their class, and demands their money back. Reluctantly, you agree. The class cost $15.Revenue 15 Cash 15 or Refund expense 15 Cash 15 8. After borrowing money, you decide to withdraw some of your investment in the studio to pursue other opportunities. You decide to withdraw $1,000.Contributed capital 1,000 Cash 1,000 (this cannot be a dividend, because your balance of retained earnings is negative. )Posting is recording in the ledger accounts the information contained in the journal. Describe how posting affects the General Journal, Special Journal and General Ledger
A trial balance is run during the accounting cycle to test whether the debits equal the credits. Identify when the trial balance is performed and its purpose
The accounts appear in this order: assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Within the assets category, the most liquid (closest to becoming cash) asset appears first and the least liquid appears last. Within the liabilities, those liabilities with the shortest maturities appear first. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts. This error must be found before a profit and loss statement and balance sheet can be produced. The trial balance is usually prepared by a bookkeeper or accountant. The bookkeeper/accountant used journals to record business transactions. The journal entries were then posted to the general ledger. The trial balance is a part of the double-entry bookkeeping system and uses the classic 'T' account format for presenting values. A trial balance only checks the sum of debits against the sum of credits. If debits do not equal credits then the accountant or bookkeeper must determine why. In the example of Highland Yoga, the pre-opening trial balance would be calculated as follows: 1. You contribute $4,000 in cash to start the business. Cash 4,000, Contributed Capital 4,000; Assets(+)=Equity(+) 2. You purchase $500 worth of mats and other equipment for use during classes.Cash -500, PPE 500; Assets(+), Assets(-)=0 3. You purchase an additional $400 worth of mats, equipment, and clothing for sale at the studio.Cash -400, Inventory 400; Assets(+), Assets(-)=0 4. You purchase liability insurance at a total cost of $1,200. The policy covers July 1 through December 31.Cash -1,200, Prepaid Insurance 1,200; Assets(+), Assets(-) The trial balance for debits will be: 4,000 (cash) + 500 (PPE) + 400 (inventory) + 1,200 (prepaid insurance) = 6,100 The trial balance for credits will be: 4,000 (contributed capital) + 500 (cash) + 400 (cash) + 1,200 (cash) = 6,100 The calculation will be the same for the next two periods in the example, including any necessary adjustments. Some reasons why the general ledger may be out of balance:
Adjusting entries are journal entries made at the end of an accounting period that allocate income and expenses to their proper period. Identify the types of adjusting entries and when and why they are made
Prepaid Insurance -100, Insurance Expense 100; Assets(-)=Equity(-) b. Depreciation @ $20/monthAccumulated Depreciation 20, Depreciation Expense 20; Assets(-)=Equity(-) a. Recognize insurance expensePrepaid Insurance -100, Insurance Expense 100; Assets(-)=Equity(-) b. Depreciation @ $20/monthAccumulated Depreciation 20, Depreciation Expense 20; Assets(-)=Equity(-) c. Pay wages from JulyCash -300, Wage Payable -300; Assets(-), Liabilities(-) d. Pay utilities from JulyCash -200, Utility Payable -200; Assets(-), Liabilities(-) The journal entries to record these transactions would be as follows: a. Expiration of insuranceInsurance expense.....................................200 -----Prepaid insurance..........................................200 b. Depreciation on studio equipment (500 for 25 months = 20/month)Depreciation expense.................................20 -----Accumulated Depreciation.................................20 a. Expiration of insuranceInsurance expense.................................200 -----Prepaid insurance.................................200 Depreciation expense.................................20 -----Accumulated Depreciation........................20 c. Pay wage from JulyWage payable.................................300 -----Cash................................................300 d. Pay utility bill from JulyUtility payable.................................200 -----Cash.................................................200 Preparing financial statements requires preparing an adjusted trial balance, translating it into financial reports, and auditing them. Explain the necessary steps to take before preparing the financial statements and the purpose of the statements
Closing the books is simply a matter of ensuring that transactions that take place after the business's financial period are not included in the financial statements. For example, assume a business is preparing its financial statements with a December 31st year end. It acquires some property on January 14th. If the books are properly closed, that property will not be included on the balance sheet that is being prepared for the period on December 31st. An adjusting entry is a journal entry made at the end of an accounting period that allocates income and expenditure to the appropriate years. Adjusting entries are generally made in relation to prepaid expenses, prepayments, accruals, estimates and inventory. Throughout the year, a business may spend funds or make assumptions that might not be accurate regarding the use of a good or service during the accounting period. Adjusting entries allow the company to go back and adjust those balances to reflect the actual financial activity during the accounting period. Failure to record the adjusting entries can result in understatement of expenses and overstatement of income, which ultimately can affect the amount of taxes paid. For example, assume a company purchases 100 units of raw material that it expects to use up during the current accounting period. As a result, it immediately expenses the cost of the material. However, at the end of the year the company discovers it only used 50 units. The company must then make an adjusting entry to reflect that, and decrease the amount of the expense and increase the amount of inventory accordingly. Using the trial balance, the company then prepares the four financial statements. These statements are:
Transferring information from temporary accounts to permanent accounts is referred to as closing the books. Identify the steps in the closing process
A post-closing trial balance is a trial balance taken after the closing entries have been posted. Explain the post-closing trial balance and why it is necessary
While each accounting period has a beginning and an end, the periods do use information from the previous period. That is why it is necessary to run a post-closing trial balance. The preparation of a post-closing trial balance serves as a check on the accuracy of the closing process and ensures that the books are in balance at the start of the new accounting period. The post-closing trial balance differs from the adjusted trial balance in only two important respects: It excludes all temporary accounts since they have been closed, and it updates the retained earnings account to its proper ending balance. Adjusting entries often disrupts routine transactions, so they are simply reversed on the first day of the new period. Describe why and how a reversing entry is made
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