1. A DAC 501: FINANCIAL ACCOUNTING PRESENTATION.
THE ACCOUNTING CYCLE
A DAC 501: FINANCIAL ACCOUNTING PRESENTATION. BY
HERICK ONDIGO
SCHOOL OF BUSINESS, UoN

2. The Accounting Cycle
The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.

3. The Accounting Cycle
For a new business, it begin by setting up ledger accounts.
For an established business, begin with account balances carried over from the previous period.

4. The Steps In The Accounting Cycle
Analyze source documents & record business transactions in a journal
Post journal entries to the ledger accounts
Prepare unadjusted trial balance (TB)
Journalize and post end of period adjustments (EOPA)
Prepare adjusted Trial Balance
Prepare /Create financial statements & reports from data in adjusted TB
Journalize and post the closing entries
Prepare the post-closing trial balance
Prepare and post reversing entries

5. Detailed Steps in the Accounting Cycle
Analyze Business Transactions.
Journalize transactions in the journal.
Prepare unadjusted trial balance.
Post entries to the accounts in the ledger.
Post-closing trial balance
Prepare financial statements.
Journalize and post adjusting entries
Prepare adjusted trial balance.
Journalize and post closing entries

6. Analysis and Recording Business Transactions
Business transaction is an economic event that causes a change in the financial position
Financial Position:
What the entity controls
How the entity controls them (claims)

7. Fundamental Accounting Equation
ASSETS = EQUITIES
ASSETS = LIABILITIES + OWNERS' EQUITY

8. How do we use the “Accounting” equation?
Recall the Basic Accounting Equation:
Assets = Liabilities + Shareholders’ Equity
Implications:
Total Asset=Claims against the assets
Therefore :
If assets increase : either Liabilities and/or Shareholders’ should also increase and vice versa
For example: borrow cash, cash (asset) will increase and Liabilities will increase
when it is paid back: cash (asset) will decrease and liabilities will decrease

9. How do we record/Account?
An ACCOUNT (ledger Account) : is an accounting device used to record changes in a of a specific asset, liability or owners’ equity item
Has 3 elements: title, debit side and credit side (also called the “T-Account”)
Changes in the accounts are entered manually into a book called a ledger or computerized ledger
Basic forms of book ledgers: the two-column account format, and the running format account
Chart of accounts

10. Definition of Ledger Account
Complete listing of business transactions for an individual account
Where you look if you want to find the balance of any given account
General Ledger
A loose-leaf book or computer file containing all the Ledger Accounts
Each account from the chart of accounts has its own ledger account in the general ledger
Complete listing of all account tittles and account names/codes used by an entity is called the chart of accounts - It is like a table of content in a book

11. Forms of Ledgers T-Account form that depicts the two-column account:

12. How do accounts behave?
Assets = Liabilities + Shareholders’ Equity So Assets increase on the left hand or debit side then they decrease on the credit side Assets + - debit credit

13. Behavior of Accounts cont…
Liabilities and Owners’ Equity accounts increase on the credit side, decrease on the debit side Liabilities or Owners’ Equity Accounts - + debit credit

14. Transaction Analysis and The Duality Concept
Double entry system states that every transactions affects at least two accounts.
Therefore
If an asset account increases (decreases), because of duality concept there must be a corresponding:
1.      increase(decrease) in a specific liability account
2.      or a decrease(increase) in a another asset account
3.      or an increase(decrease) in owners' equity account.

15. What Is a General Journal?
The book in which a person enters the original record of a business transaction
Commonly referred to as a book of original entry
Chronological listing of all the business transactions for the company
Each listing records the debits and credits associated with that business transaction
A book or a location on a hard drive where all business transactions are listed
Like a diary
Accounting Is Fun!

16. What’s in a Journal Entry?
Date
At least one debit entry
Debit account, use exact account title, do not indent titles
At least one credit entry
Credit account, use exact account title, indent titles
An explanation of the transaction:
Check number
Invoice number
Accounts receivable customer name
Many other elements OR details as appropriate…
Remember: the accountant must leave a good audit trail so that users of accounting information can understand what occurred with each transaction
DR=CR

17. Illustration of the accounting process
1. On Jan Ms.Farida invested $100,000 at the inception of the business, Express Travel Agency

18. 2. On 1 January employed a full time secretary and a sales representative.

19. 3. On 1 January rented an office building and paid 3 months rent of $600.

20. 4. On 2 January office furniture and equipment is purchased for $ 15,000 , for which $ 5,000 is paid in cash and the rest would be paid later in January and February 2010.

21. 5. On 3 January insured the office building and the equipment effective from 1 January to 31 December 2010 and paid $ 120 for the whole period.

22. 6. On 5 January the company signed an agreement with Keya Airline to sell their airline tickets and receive commissions in return.

23. 7. On 10 January Express Travel Agency borrowed $15,000 from the bank at an annual interest rate of 24% for six months. The principal and the interest of the loan will be paid together on 10 July 2010.

24. 7. On 10 January Express Travel Agency borrowed $ 15,000 from the bank at an annual interest rate of 24% for six months. The principal and the interest of the loan will be paid together on 10 July 2010.

25. 8. On 10 January purchased office supplies for $2.500 in cash.

26. 8. On 10 January purchased office supplies for $2,500 in cash.

27. 9. During the first half of January the agency sold tickets to various customers and on 16 January issued a commission invoice to clients amounting to $5,000 that will be collected later in January 2010.

28. 9. During the first half of January the agency sold tickets to various customers and on 16 January issued a commission invoice to clients amounting to $ 5,000 that will be collected later in January 2010.

29. 10. On 20 January the company paid $5,000 for the furniture and equipment that were purchased on 2 January.

30. 10. On 20 January the company paid $5
10. On 20 January the company paid $5.000 for the furniture and equipment that were purchased on 2 January.

31. 11. On 22 January received $7,500 from a customer for organizing the accounting conference that will be held on February 2, 2010.

32. 11. On 22 January the company received $7
11. On 22 January the company received $7.500 from a customer for organizing the accounting conference that will be held on 2 February 2010.

33. 12. The company received the full payment of commission charged to Kenya Airlines of $ on 23 January.

34. 12. The company received the full payment of commission charged to Kenya Airline s of $ 5,000 on 23 January.

35. 13. On 24 January paid salaries of $ 9,000 employees in cash.

36. 13. On 24 January paid salaries of $ 9,000 employees in cash.

37. 14. During the second half of January the agency sold tickets to various customers and on 31 January issued a commission invoice to Kenya Airline amounting to $ 7,500 which will be collected in February 2010.

38. 14. During the second half of January the agency sold tickets to various customers and on 31 Jan sent an invoice to Kenya Airline amounting to $7,500 which will be collected in February 2010

39. 15. Ms. Farida ( the proprietor) withdrew $ 3,000 on 31 January for her personal use.

40. 15. Ms. Farida withdrew $ 3.000 on 31 January for personal use.

41. Summary of Journalizing
Steps:
Determine the effects of transactions on three components of the accounting equation,
Determine which specific accounts are affected, and
Assure that total of the increases should be equal to either increases on the other side of the equation or to decreases on the same side, or a combination there of.

42. Behavior of Accounts- Summary
Assets = Liabilities + Owners’ Equity Dr Cr Dr Cr Dr Cr Expense Revenue Dr Cr Dr Cr Withdrawals/Dividends + - Dr Cr

43. Accounting Cycle-Revisited
Post the transactions and prepare trial balance
Analyze and record the transactions
Adjust the accounts and prepare trial balance
Prepare the financial statements
Close the accounts and prepare trial balance

44. Posting -Defined
The process of transferring figures from the journal to the ledger accounts
It simply involves transferring data from one accounting entry into another
The purpose is to classify and summarize transactions and events affecting specific elements of the financial statements

45. Four-Step Posting Process
Transfer transaction date to account’s date column
Transfer the debit/credit amount and calculate the new balance
Write journal page number in posting reference column of ledger as a cross-reference
Go back to journal and write account number in posting reference column of journal as a cross-reference
Cross-reference
The ledger account number in the Post. Ref. column of the journal and the journal page number in the Post. Ref. column of the ledger account

46. Posting to The Ledger illustrated

47. Posting illustrated

48. Exercise
Post all the above transactions (journal entries) to the following ledger accounts:
Prepaid Rent, Office supplies, Prepaid insurance, Office Furniture & Equipment, Bank loan, Accounts Payable, Unearned Revenue, Capital, Withdrawals, Commission Revenue, & Salary Expense
Cast the ledger accounts
Determine the balances carried down (Bal c/d) and balances brought down (b/d)
Prepare a summary of the ledger balances in a two columnar listing to derive the Trial Balance( TB)

49. SUMMARY -Normal Balances of Accounts
Category of the Account
Increase Recorded By
Normal Balance
Assets
Debits
Debit
Liabilities
Credits
Credit
Shareholders’ Equity
Capital
Dividends or Withdrawals
Revenues
Expenses

50. Preparing a Trial Balance
List the ledger account balances in two columns on the trial balance
Left column = Debits
Right column = Credits
Trial balance proves DR = CR

51. The Balancing of Accounts, The Trial Balance & Financial statements
Introduction:
In the previous exercise , you have learned the principles of double entry and how to post to the ledger accounts. The next step in our progress towards the financial statements is the trial balance.
Before transferring the relevant balances at the year end to the financial statements, it is usual to test the accuracy of the double entry bookkeeping records by preparing a trial balance. This is done by taking all the balances on every account. Due to the nature of double entry, the total of the debit balances will be exactly equal to the total of the credit balances.

52. The Balancing of Accounts & The Trial Balance
Question: Once you have closed all the accounts, what would do?
Answer: Prepare a Trial Balance
Question: What is a Trial Balance then? What is it for? How does it look like?
Answer: A Trial Balance is a list of nominal ledger account and their balances at a given date. It is usually prepared on the last day of the accounting period. It consists of a Debit and a Credit balance.
Its purposes:
(1) It is prepared to check that the total of debit balances is the same as the total of credit balances and offer reassurance that the double entry recording from day books has been done correctly.
(2) For preparation of statement of income and the statement of financial position

53. The Balancing of Accounts & The Trial Balance
The rules to prepare the Trial Balance:
Total Debit Entries = Total Credit Entries
Debit
Credit
Assets
Expenses
Drawings
Income/ Revenue
Liabilities
Capital

54. The Balancing of Accounts & The Trial Balance
Steps to preparing the Trial Balance:
Balance/cast ALL the ledger accounts in the books.
List all the Debit balances on the debit side and add them up.
List all the Credit balances on the credit side and add them up.
Ideally the trial balance should balance after step 3

55. The Balancing of Accounts & The Trial Balance
What if the trial balance shows unequal debit and credit balances?
If the columns of the trial balance are not equal, there must be an error in recording or processing the transactions.
4 Errors revealed by the trial balance:
The errors revealed are those errors which cause the Trial Balance totals to disagree. (i.e do not balance)
There are FOUR types of errors revealed by a trial balance:
1) Posting to the wrong side of an account.
2) Errors in calculation and balancing
3) Incorrect amounts entered on one entry
4) Omission of one entry.

56. The Balancing of Accounts & The Trial Balance
Question: How do we locate all of the above errors?
Answers: 1) Check day-book (journal) totals
2) Check additions of Ledger accounts, ensure each balance is correct
3) Check all ledger account balances have been recorded in the Trial Balance.
4) Check all balances have been entered in the Trial Balance on the correct side.
5) Check additions have been done correctly

57. The Balancing of Accounts,& The Trial Balance
Question: Once you are sure there is no mistake made in the Trial Balance, what do you do in the next step?
Answers: Prepare End of Period Adjustment & then prepare the following statements:
1) Statement of Income
2) Statement of Financial Position
In short, these are the steps:
1) Trial Balance
2) End of Period Adjustments
3) Statement of Income
4) Statement of Financial position

58. The Balancing of Accounts & The Trial Balance
However, a trial balance will not disclose the following types of errors: (Errors not revealed by the trial balance)
1) Errors of omission
Complete omission of a transaction, because neither a debit nor a credit is made.
2) Errors of commission
This happens when original figure incorrectly entered. (Correct double entries but incorrect amounts were recorded)

59. The Balancing of Accounts & The Trial Balance
3) Compensating errors
This happens where errors cancel out each other. (eg an error of £100 is exactly cancelled by another £100 error elsewhere).
4) Errors of principles
This happens when the wrong type of account had been used (eg the purchase of a motor van is debited to a expense account, such as motor expenses, rather than a fixed asset account)
5) Complete reversal of entries
This happens when an account should be debited but was credited (and vice versa)

60. The Trial Balance

61. THE END
THANK YOU