accounting moduel 2

1. MODULE 2

2. ACCOUNTING CYCLE
• The accounting cycle is a collective process of identifying, analyzing, and
recording the accounting events of a company. It is a standard 8-step
process that begins when a transaction occurs and ends with its inclusion
in the financial statements.
• The key steps in the eight-step accounting cycle include recording journal
entries, posting to the general ledger, calculating trial balances, making
adjusting entries, and creating financial statements.

3. How the Accounting Cycle Works
• The accounting cycle is a methodical set of rules to ensure the accuracy
and conformity of financial statements.
• Computerized accounting systems and the uniform process of the
accounting cycle have helped to reduce mathematical errors.
• Today, most software fully automates the accounting cycle, which results
in less human effort and errors associated with manual processing.

4. Steps of the Accounting Cycle
• Identify Transactions:
An organization begins its accounting cycle with the identification of those
transactions that comprise a bookkeeping event. This could be a sale,
refund, payment to a vendor, and so on.
Record Transactions in a Journal:
ext come recording of transactions using journal entries. The entries are
based on the receipt of an invoice, recognition of a sale, or completion of
other economic events.

5. Posting
• Once a transaction is recorded as a journal entry, it should post to an
account in the general ledger. The general ledger provides a breakdown
of all accounting activities by account.
Unadjusted Trial Balance: After the company posts journal entries to
individual general ledger accounts, an unadjusted trial balance is prepared.
The trial balance ensures that total debits equal the total credits in the
financial records

6. • Worksheet: Analyzing a worksheet and identifying adjusting entries
make up the fifth step in the cycle. A worksheet is created and used to
ensure that debits and credits are equal. If there are discrepancies then
adjustments will need to be made.
• Adjusting Journal Entries: At the end of the period, adjusting entries
are made. These are the result of corrections made on the worksheet and
the results from the passage of time. For example, an adjusting entry may
accrue interest revenue that has been earned based on the passage of
time.

7. • Financial Statements: Upon the posting of adjusting entries, a
company prepares an adjusted trial balance followed by the actual
formalized financial statements.
• Closing the Books: An entity finalizes temporary accounts, revenues,
and expenses, at the end of the period using closing entries. These
closing entries include transfering net income into retained earnings.
Finally, a company prepares the post-closing trial balance to ensure debits
and credits match and the cycle can begin anew.

8. Timing of the Accounting Cycle
• The accounting cycle is started and completed within an accounting
period, the time in which financial statements are prepared.
• Accounting periods vary and depend on different factors; however, the
most common type of accounting period is the annual period.
• During the accounting cycle, many transactions occur and are recorded.
• At the end of the year, financial statements are generally prepared, which
are often required by regulation.
• Public entities are required to submit financial statements by certain
dates.
• Therefore, their accounting cycle revolves around reporting requirement
dates.

9. KEY INFORMATION
• The accounting cycle is a process designed to make financial accounting
of business activities easier for business owners.
• The first step in the eight-step accounting cycle is to record transactions
using journal entries, ending with the eighth step of closing the books
after preparing financial statements.
• The accounting cycle generally comprises a year or other accounting
period.
• Accounting software today mostly automates the accounting cycle.

10. Classification of accounts based on accounting equation
(modern classification)
• This classification also known as modern classification is based on the
nature of accounts. Broadly speaking, there are mainly three types of
accounts which are discussed below one by one.
• Assets : These accounts are related to all types of assets whether tangible
or intangible. Example, Land and building, plant and machinery,
furniture and fixture, all current assets such as cash, bank, Stock debtor,
Bills receivable, goodwill, patents accounts, etc.
• Liabilities: These refer to such accounts, which create obligations for the
business from the outsiders. Such as creditors, bills payable long term
loans in the form of debentures and outstanding liablities

11. • Capital: These refers to such accounts, which are for the propritor of the
business, example is cash/ goods brought in as capital and drawings etc.
• As the capital is affected by expenses and profits, there will be two more
types of accounts as part of capital.
• Expenses: Expenses refer to such accounts which show the amount
which is incurred / spent or lost n the process of earning revenues, for
example, purchase account, wages account, discount allowed, interest
paid/payable, rent paid/ payable, goods lost in fire etc.
• Incomes or gains: Incomes refer to such accounts which are brought in
by way of goods or rendering of services by the business, for exa,ple,
sales discount received, royalty, interest received, dividend received etc

12. The following are the rules for debit and credit
Assets
• Increase in assets Debit
• Decrease in assets Credit
Capital
• Increase in capital Credit
• Decrease in capital Debit
Liabilities
• Decrease in liability Debit
• Increase in Liablity Credit
Revenue Income
• Decrease in revenue Debit
• Increase in revenue Credit
Expenses
• Increase in expenses Debit
• Decrease in expenses credit

13. Significance of the rule of debit and credit
• A debit balance always tells one of the following:
• The following asset are owned by the business
• The following amounts have been incurred /spent by the business.
• The following persons are the debtor of the business or they owe this
much to the firm.
whereas a credit balance will always show that,
• The firm has earned this much.
• The firm owes this much to the outsiders.