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Chapter 3

Chapter 3. The Accounting Cycle. Started business with 35,000 $ by Mr.Ali Purchase Equipments for 2,000$ cash Services provided to customers for 4,000$, cash received only 1,000$ Rent of building paid 700$ Car purchased for 12,000 cash paid 3,000$

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Chapter 3

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  1. Chapter 3 The Accounting Cycle

  2. Started business with 35,000 $ by Mr.Ali • Purchase Equipments for 2,000$ cash • Services provided to customers for 4,000$, cash received only 1,000$ • Rent of building paid 700$ • Car purchased for 12,000 cash paid 3,000$ • Fuel bill received for 300$ but the amount is not yet paid • Bank loan taken 15,000$ • Cash paid 5,000$ to person from whom we purchased car • Cash received from A/R 1500$

  3. Complete Accounting Cycle

  4. The Journal In an actual Accounting System, the information regarding each business transaction in initially recorded in a book called Journal.

  5. The Journal The word “Journal” is actually derived from a word “Journ” that means day.. Hence Journal means “daily”. Because of daily transactions are recorded here on day to day basis therefore this book called Journal.

  6. The Journal Journal also called the “book of original entry”, because the business transaction are first of all recorded here. In Journal all the transaction are recorded on chronological basis.

  7. Debit (Dr) &Credit (Cr) • Debit means “Left” • Credit means “Right”

  8. Debit & Credit(Dr…Cr.) • Debit means “that comes into the business” • Credit means “that goes out from the business”

  9. Debit & Credit(Dr…Cr.) Debit: The Debit is derived from a word “Debare” which means “to owe”

  10. Debit & Credit(Dr…Cr.) Credit: This word is derived from word “Credere” and that means “to be owed”

  11. Debit & Credit(Dr…Cr.) There is no specific meaning of Dr. and Cr. They are just the signs to follow the accounting rules/principles and that's all.

  12. Head of Accounts • Assets • Expenses • Owner’s Equity • Liabilities • Revenues

  13. Rules of Dr. and Cr. • Assets • Expenses • Owner’s Equity • Liabilities • Revenues Increase……. Debit Decrease……Credit Increase……. Debit Decrease……Credit Increase……. Credit Decrease…… Debit Increase……. Credit Decrease…… Debit Increase……. Credit Decrease…… Debit

  14. Rules of Dr. and Cr. • Assets • Expenses • Owner’s Equity • Liabilities • Revenues Increase.......Dr Decrease…..Cr Increase....... Cr Decrease….. Dr

  15. Journal Entry Recording the business transaction in initial book of accounts according to the rules of Dr. and Cr is called Journal Entry

  16. Methodology of making a Journal Entry • Analyze the business transaction • Determine the rules regarding such transaction • Make the Journal Entry

  17. Journal Entry March 13th. The business takes a loan form bank of $ 40,000.

  18. Methodology of making a Journal Entry March 13th. The business takes a loan form bank of $ 40,000.

  19. Methodology of making a Journal Entry March 13th. The business takes a loan form bank of $ 40,000.

  20. Journal Entry

  21. Why use Journal….? • The Journal shows all information of a transaction in one place and also provide and explanation of it. • The Journal provides a chronological record of all the events in the life of business • The use of Journal helps to prevent errors

  22. Posting The process of transferring the Dr. and Cr. From Journal to Ledger Accounts is called “posting”.

  23. The Ledger/ Account/ T account A separate record for each item like cash, bank, liability, salaries, sales etc is called “Ledger”, or “Account” or some times called “T account”.

  24. Ledger Accounts _______ Ledger Account No…. 3 (e.g.) Dr. Cr.

  25. Ledger Accounts or “T” Account _______ Ledger Account No…. 3 (e.g.) Dr. Cr.

  26. Trial Balance Before using the account’s balances to prepare financial statements, it is desirable to prove that the accounts with Dr balances are in fact equal to the total of Cr balances. This proof of equality of Dr and Cr balances is called Trial Balance.

  27. Trial Balance Trial: means to check before finalizing….that's why its called Trial Balance because it checks that balances are equal or not

  28. Note: about Trial Balance If the balances of Dr and Cr sides are not equal it means you have made some error. But if the balances or Dr and Cr are equal it doesn’t mean that you have made no error.

  29. Robert Real Estate CompanyTrial Balancefor the month of March 2009

  30. What is Net Income…? A increase in owner’s equity resulting from the profitable operation of business (loss is inverse of this)

  31. The Income Statement A statement that shows the Profit or Loss of the business for a specified period of time And it contains: Revenue & Expenses

  32. Income Statement ROBERTS REAL ESTATE COMPANY Income Statement For the month ended February 2009 ______________________________________________________________ Revenue: Sales commission earned………………………………… $ 10640 Less; Expenses: Advertising expense…………………………… $ 630 Salaries expense………………………….......... 7,100 Telephone expense…………………………….. 144 Depreciation expense: building……………… 150 Depreciation expense: office equipment.. 45 (8,069) Net Income……………………………………………………………….. $ 2,571

  33. Revenue Revenue is the price of goods sold & services rendered during a given accounting period. It may be: Sales Commission received Interest received Fees earned etc

  34. When to record Revenue…? Realization Concept: • When received the order…? • When transfer the goods/ rendered the services…? • When received the amount…? When the ownership is transferred.

  35. Expenses Expenses are the cost of goods and services used up in the process of earning revenue.

  36. When to record Expenses…? Matching Principle: In measuring Net Income for a period, revenue should be offset by all the expenses incurred in producing that revenue. This concept of offsetting expenses against revenue on a basis of “cause & effect” is called the Matching Principle.

  37. Expenditures benefiting more than one Accounting period Many expenditures made by a business benefit two or more accounting periods. In such situation we need to apportion the stated expenditure for matching it with the related revenue.

  38. Adjusting Entries:The next step in the Accounting Cycle Many transactions affect the revenue or expenses of two or more accounting periods. How do the accountants allocate the cost of these assets to expense over a span of several accounting periods? The answer is Adjusting entries.

  39. Adjusting Entries: Adjusting Entries are made at the end of each accounting period. Such entries allocate the actual revenue earned in a specific accounting period and relevant expenses. There are several different types of adjusting entries; in fact, many businesses make a dozen or more adjusting entries at the end of every accounting period.

  40. Robert Real Estate CompanyTrial Balancefor the month of March 2009

  41. Adjusting entry Recording depreciation of Building: Calculation: Price of Building = 36,000 Number of years = 20 years • 36,000/20 = 1800 (per year depreciation) • 1800/12 = 150 (per month depreciation)

  42. Recording depreciation of Office equipment: Calculation: Price of equipment = 5,400 Number of years = 10 years 5,400/10 = 540 (per year depreciation) 540/12 = 45 (per month depreciation) Adjusting entry

  43. Robert Real Estate CompanyAdjusted Trial Balancefor the month of March 2009

  44. Preparation of Financial Statements • Income Statement • Statement of Owner’s Equity • Balance Sheet

  45. Income Statement A statement that shows the profit or loss of the business for a specific time period. This statement consisting; • Revenue for the accounting period • Expenses for the accounting period

  46. ABC CorporationAdjusted Trial Balancefor the month of March 2009

  47. Income Statement ROBERTS REAL ESTATE COMPANY Income Statement For the month ended March 30th, 2009 ______________________________________________________________ Revenue: Sales commission earned………………………………… $ 10640 Less; Expenses: Advertising expense…………………………… $ 630 Salaries expense………………………….......... 7,100 Telephone expense……………………………. 144 Depreciation expense: building……………… 150 Depreciation expense: office equipment.. 45 (8,069) Net Income……………………………………………………………….. $ 2,571* * It is a part of owner’s equity because is to be paid to owner of the business

  48. Statement of Owner’s Equity This statement shows the obligation of business to its owner. This statement consisting ; • Capital invested by owner • Profit of the current accounting period • Drawings of the owner

  49. ABC CorporationAdjusted Trial Balancefor the month of March 2009

  50. ROBERT REAL ESTATE COMPANYStatement of Owner’s Equityas on March 30th, 2009 Capital: James Robert…….... $ 181,000 Add: Profit for the period........ 2,571* $ 183,571 Less: Drawings: ……………... 2,800 Net Owner’s Equity…….......... $ 180,771 * Form Income Statement

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