Accounting Cycle I

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Accounting Cycle I
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Lecture Outline

• Introduction to the Accounting Cycle
• How to Prepare General Journal Entries
• Lecture Illustration I
• Periodic Vs Perpetual Inventory System
• Lecture Illustration II
• Posting Journal Entries to the Ledger
• Preparing an Unadjusted Trial Balance

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The Accounting Cycle

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Purpose of Accounting Cycle

• The sole purpose of the accounting cycle is to
  enable the preparation of financial statements.
• These statements are used by external users
• Investors
• Lenders
• Suppliers

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General Journal

• Is the first record of business transactions in
  date order.
• Date Detail Dr Cr

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General ledger

• The general journal entries are transferred
  posted into the general ledger.
• The general ledger keeps a record of each
  transaction by account.
• Date Detail Dr Cr Bal Dr/Cr

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Preparing Journal Entries 3 Steps

• Step One
• Which accounts are being affected?
• Accounts are common categories of A, L, E, R
  of the organisation.
• There will always be at least two accounts
  affected.
• Step Two
• Are the accounts increasing or decreasing?
• ie Is the amount of cash we have on hand
  increasing or decreasing after the transaction.

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Preparing Journal Entries 3 Steps

• Step Three
• Apply the Debit/Credit Rule and make the journal
  entry.
• Remember the Balance sheet equation
• A L O
• and the profit loss equation
• P R E
• These can be combined to give the accounting
  equation
• A E R L O

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Debit/Credit Rules

• DEBIT NATURE DEBIT
• 1. Assets
• 2. Expenses
• CREDIT NATURE CREDIT
• 1. Liabilities
• 2. Owners Equity
• 3. Revenue

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Debit or Credit Nature??

• Debit Nature Credit Nature
• A E R L O

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Debit or Credit Nature??

• A.L.O.R.E
• Credit Nature

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Example 1

• On 28th April Wiggles Ltd. purchased 1,000 worth
  of inventory on credit.
• What is the journal entry required to record this
  transaction??

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Solution 1

• Step One Accounts Affected??
• The two accounts being affected are the inventory
  account and accounts payable account (ie we
  purchased inventory on credit and therefore we
  owe our supplier money).

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Solution 1

• Step Two Accounts Increasing or Decreasing
• Do we have more or less inventory following this
  transaction??
• More
• Do we owe more or less money following this
  transaction??
• More

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Solution 1

• Step Three
• Inventory is an asset, which has a debit nature.
  It is increasing therefore we will debit
  inventory in the general journal.
• Accounts payable is a liability. Liabilities
  have a credit nature. Accounts payable is
  increasing therefore we must credit this account
  in the general journal.

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General Journal

• Debit Credit
• Inventory 1,000
• Accounts Payable 1,000
• (Inventory acquired on credit)
• It is standard practice to put the debit entry
  first.

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Example 2

• On the 2nd May Wiggles Ltd. paid the 1,000 they
  owe to their supplier.
• What is the journal entry required to record this
  transaction?

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Solution 2

• Step One Accounts Affected??
• The two accounts being affected are the cash
  account and accounts payable account.
• Hint
• Whenever the words paid or received are used
  you know the cash account is being affected.

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Solution 2

• Step Two Accounts Increasing or Decreasing
• Do we have more or less cash following this
  transaction??
• Less
• Do we owe more or less money following this
  transaction??
• Less

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Solution 2

• Step Three
• Cash is an asset, which has a debit nature. It
  is decreasing therefore we will credit cash in
  the general journal.
• Accounts payable is a liability. Liabilities
  have a credit nature. Accounts payable is
  decreasing therefore we must debit this account
  in the general journal.

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General Journal

• Debit Credit
• Accounts Payable 1,000
• Cash 1,000
• (Payment to Supplier)
• A narration simply explains what the journal
  entry is about. Narrations will not be required
  in this course.

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Preparing Journal Entries

• The Key to Preparing Journal Entries
• Be logical
• Be methodical (ie account for one part of the
  transaction at a time. Dont try to do
  everything at once.)

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Periodic Inventory System

• The amount of inventory on hand is known only
  twice
• The beginning of the period
• The end of the period (following a stocktake)
• The inventory account is not updated after each
  sale.

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Perpetual Inventory System

• The amount of inventory on hand is known at all
  times.
• The inventory account is updated perpetually
  (ie after each new sale).
• The perpetual system has become the dominant
  inventory system due to the computerisation of
  business.