1. The Accounting Cycle – Step 1
Professor Eric Carstensen
MiraCosta College

2. The Accounting Cycle Step 1: Analyze Transactions
Step 2: Prepare Journal Entries
Step 3: Post Entries to Ledgers
Step 4: Prepare Unadjusted Trial Balance
Step 5: Prepare and Post Adjusting Entries
Step 6: Prepare Adjusted Trial Balance
Step 7: Prepare Financial Statements
Step 8: Prepare and Post Closing Entries
Step 9: Prepare Post-Closing Trial Balance

3. Analyzing Transactions
Determine how many accounts are involved
Determine if these accounts are assets, liabilities, equity, expenses, revenue or other accounts
Determine whether these accounts are increasing or decreasing

4. Transactions = Events and Instances That Affect Our Business
invest $35,000 cash in exchange for stock b.
purchase insurance policy for $4,800 c.
pay first month's rent = $3,000 d.
purchase equipment for $2,000 down payment with balance ($5,200) due in 60 days e.
borrow $10,000 on note payable f.
purchase office supplies = $1,300 g.
receive payment for services = $4,500 h.
pay assistant = $2,000 for 10 days work i.
earn $7,900 to be paid in 30 days j.
make partial payment on A/P = $3,600 k.
pay dividends = $1,000 l.
receive partial payment on A/R = $4,000

5. transaction a Owner invests $35,000 in exchange for common stock
Two accounts involved
There is a 35,000 increase in the asset cash and a 35,000 increase in the owners’ equity account common stock
Assets side increases 35,000 and Liabilities & Equity side increases 35,000

6. transaction b Purchase insurance policy for $4,800
Two accounts involved
There is a 4,800 increase in the asset prepaid insurance and a 4,800 decrease in the asset cash
Assets, in total are unchanged (prepaids increase and cash decrease); Liabilities & Equity side is not affected

7. How Net Income Affects Retained Earnings (and Owners’ Equity)
1. Income Statement
2. Statement of Retained Earnings
Revenue
Beginning Retained Earnings
less: Expenses
add: Net Income
= Net Income
less: Distributions
= Ending Retained Earnings

8. How Net Income Affects Retained Earnings and Equity - Continued
Scenario #1
Scenario #2
Revenue
1,000
Expenses
Net Income
-1,000
Retained Earnings
+1,000
Owners' Equity

9. transaction c Pay first month’s rent = $3,000 Two accounts involved
There is a 4,800 increase in rent expense and a 3,000 decrease in the asset cash
Assets side decreases 4,800 and equity side decreases 4,800 as a result of expense

10. transaction d
Purchase office furniture = $2,000 down payment + balance ($5,200) due in 60 days
Three accounts involved
There is a 7,200 increase in the asset office furniture, a 5,200 increase in the liability A/P and a 2,000 decrease in the asset cash
Net increase to Assets is 5,200 and increase of 5,200 to Liabilities & Equity side

11. transaction e borrow $10,000 on note payable Two accounts involved
There is a 10,000 increase in the asset cash and a 10,000 increase in the liability notes payable
Assets side increases 10,000 and Liabilities & Equity side increases 10,000

12. transaction f Purchase office supplies = $1,300 Two accounts involved
There is a 1,300 increase in the asset supplies and a 1,300 decrease in the asset cash
No change to Assets side; Liabilities & Equity side is not affected

13. transaction g receive payment for services = $4,500
Two accounts involved
There is a 4,500 increase in the asset cash and a 4,500 increase in revenues
Assets side increases 4,500 and Liabilities & Equity side increases 4,500 due to revenue

14. transaction h Pay assistant = $2,000 for 10 days work
Two accounts involved
There is a 2,000 increase in wages expense and a 2,000 decrease in the asset cash
Assets side decreases 2,000 and Liabilities & Equity side decreases 2,000 due to expense

15. transaction i Earn $7,900 to be paid in 30 days Two accounts involved
There is a 7,900 increase in the asset A/R and a 7,900 increase in revenues
Assets side increases 7,900 and Liabilities & Equity side increases 7,900 due to revenue

16. transaction j Make partial payment on A/P = $3,600
Two accounts involved
There is a 3,600 decrease in the liability A/P and a 3,600 decrease in the asset cash
Assets side decreases 3,600 and Liabilities & Equity side decreases 3,600

17. transaction k Pay dividends = $1,000 Two accounts involved
There is a 1,000 increase in the contra equity account dividends and a 1,000 decrease in the asset cash
Assets side decreases 1,000 and Liabilities & Equity side decreases 1,000

18. transaction l Receive partial payment on A/R = $4,000
Two accounts involved
There is a 4,000 increase in the asset account cash and a 4,000 decrease in the asset A/R
The net effect to the Assets side is zero; Liabilities & Equity side not affected

19. Summary of All Transactions
Cash
A/R
Ppd. Insur.
Supplies
Equipment =
A/P +
ST Note
Equity
<---
Stock
Revenue
Expenses
Dividends a.
35,000 b.
(4,800)
4,800 -
bal.
30,200 c.
(3,000)
3,000
27,200
32,000 d.
(5,000)
14,200
9,200
22,200 e.
10,000
32,200 f.
(1,300)
1,300
30,900 g.
4,500
35,400
36,500 h.
(2,000)
2,000
33,400
34,500
5,000 i.
7,900
42,400
12,400 j.
(3,600)
29,800
5,600 k.
(1,000)
1,000
28,800
41,400 l.
4,000
(4,000)
total
32,800
3,900

20. Preliminary Financial Statements
1. Income Statement
2. Statement of Retained Earnings
Revenues
$ ,400
Beginning Balance $
Rent Expense
3,000
Net Income
7,400
Wages Expense
2,000
Dividends
(1,000)
Total Expenses
5,000
Increase (Decrease)
6,400
$ 7,400
Ending Balance
$ ,400
3. Balance Sheet
Assets
Liabilities
Cash
$ 32,800
Accounts Payable
$ 5,600
Accounts Receivable
3,900
Notes Payable
10,000
Prepaid Insurance
4,800
Total Liabilities
$ ,600
Supplies
1,300
Total Current Assets
$ ,800
Owners' Equity
Paid in Capital
35,000
Equipment
14,200
Retained Earnings
Total Plant Assets
Total Owners' Equity
41,400
Total Assets
$ 57,000
Total Liabilities & Equity

21. Step 1 - Conclusion
We could keep the books using a similar spreadsheet, but, as we add more transactions and accounts it would become unruly
In Step 2, we’ll learn to use debits and credits to create proper journal entries and make our record keeping easier