Unit 4 The Accounting Cycle

1. Unit 4
The Accounting Cycle
Orcutt Academy High School
Accounting & Finance

3. 4-1 Source Documents
 What are Source Documents?
◦ Invoice
◦ Receipt
◦ Deposit Slip
◦ Check Counterfoil
◦ Statement
◦ Payment Confirmation

4. Why Source Documents
 The first documents that exist relating to
a transaction.
 Serve as proof for a transaction
◦ Include date and time

5. Invoices
 Normally relate to
credit transactions
 List goods or services
provided and their
prices.
 Suppliers normally
send an invoice with
goods (or once
services have been
delivered)
 Indicate payment
terms (time, # of
payments, etc…)
 “Bills”

6. Receipts
 Confirm that services or goods have been
received.
 Normally relate to cash transactions.

7. Deposit Slip
 Proof that cash, including currency and
checks, has been deposited in a bank
account.

8. Check Counterfoil
 This is the part of the check kept by the
drawer (writer) of the check as a record
of the transaction.

9. Statement
 A report showing
◦ the amount owed
by one business
to another
◦ details of
transactions
between the two
businesses

10. Payment Confirmation
 Proof of
Internet
transactions

12. 4-2 Accounting
Journals

13. What are Journals?
 Debits and Credits
in Chronological
Order
 Used to be an
actual book.
 Now accountants
record journal
entries using an
accounting
program.

14. Purpose
 Purpose
◦ To keep a day-to-day record of a business and
its transactions.
 Includes a brief explanation.
◦ Should accurately describe what took place, so
that anyone who glanced at it for the first time
could easily identify what occurred.

15. Supporting Documents &
Folio Numbers
 Each journal can be matched to the
relevant supporting document
◦ Check counterfoil, receipt, etc…
 A cross-referencing code or folio number
is included.
 This code or folio number simply cross-
references between one document and
another.

16. Supporting Documents &
Folio Numbers
 If this transaction of $15,000 capital was
made by issuing check number 38, then
one could write “Ch-38” (for example)
under the folio number.

17. Why include folio numbers?
 To easily trace the recorded transaction
back to the source document
 To verify that the transaction actually took
place.

18. Folio Numbers for Accounts
 Each specific account, such as bank,
would have its own folio number
 Used to cross reference from the journal
entry involving “bank” to the bank’s
account in the ledger
◦ This will be covered in the next section.
 Make it simple to trace information
through the steps in the accounting cycle.

19. Cross-Referencing Accounts
 “Sal-1” is the individual code for the account
“salaries.” “J-1” is the code for “journal page 1.”
 One could follow information from the journal entry to
an account in the ledger, or from an account in the
ledger back to the journal entries.

20. The Different Journals
1. Cash Receipts Journal – for all cash
receipts.
2. Cash Payments Journal – for all cash
payments.
3. Sales Journal – all sales on credit
(debtor)
4. General Journal – for all transactions not
falling under any of the above journals.
(There are other journals we will not be using in this
class)

21. Cash Receipts Journals
 Where you record all cash that has been received.
 Major categories of receipts, such as from income or
from debtors, receive their own column.
 The category called “sundry” is used to represent less
regular items, such as capital or receiving cash from
a loan.
◦ The word sundry means “various,” “miscellaneous” or
“general.”
 The “bank” column is added up to show the total cash
received for the period concerned.

22. Cash Payments Journal
 Where you record all transactions where
cash has been paid out.

23. Cash Book & Petty Cash
 The cash receipts journal and cash
payments journal can be replaced by the
cash book, which is simply a combination
journal showing all receipts and all
payments together.
 Petty cash, which is simply a sum of cash
on hand kept to pay small expenses, can
also have its own separate journal.

24. General Journal
 Where you record any transaction that
does not fall under the other journals.
 Record the name of the account and the
amount under either Debit or Credit

26. 4-3 Ledger
(T-Accounts)

27. What is a ledger?
 A whole bunch of T-accounts grouped
together.
 The main ledger is called the general
ledger. Virtually all T-accounts in a
business fall under the general ledger.

28. T-Accounts
 A visual aid for seeing the effect of debits
and credits on a particular account.
 Every transactions affects two or more
accounts, so it is recorded in two or more
T-accounts

29. Cash and Notes Payable T-Accounts

30.  On June 1, 2012 a company borrows
$5,000 from its bank.

31.  On June 2, 2012 the company repaid
$2,000 of the bank loan.

33. 4-4 Balancing
T-Accounts

34. In Practice
 In practice we would not put each individual
transaction concerning bank into the “bank”
T-account. Instead, we would simply take the
total of cash receipts from the cash receipts
journal (column “bank”) and insert this on
the debit side of the “bank” T-account. We
would likewise take the total of cash
payments from the cash payments journal
(column “bank”) and insert this on the credit
side of the “bank” T-account.

35. George’s Catering
 The “total” from
the cash payments
journal
 The “total” from
the cash receipts
journal

36. George’s Catering
 Debit Balance – Cash Payments
 $39,800 – $20,700 = $19,100
 Balance b/f (bring forward)
◦ The closing balance of the bank
account prior to the transactions
Debit Balance
$4,300+$35,500=$39,800
Credit Balance
$20,700+$19,100= $39,800

37. George’s Catering
 How much money you have in the
bank!
 Debit Balance – Cash Payments
 $39,800 – $20,700 = $19,100

38. Create Bank T-Accounts for
Jamaal’s & Tobey’s
 Balance b/f for each company is $5,000
 Jamaal Allen’s Photography
◦ Cash Receipts: $20,800
◦ Cash Payments: $9,225
 Tobey’s Catering
◦ Cash Receipts: $22,300
◦ Cash Payments: $3,495

40. 4-5 Trial Balance &
Financial Statements
Trial Balance
Financial Statements:
1. Income Statement
2. The Statement of Changes in Owner’s Equity
3. Balance Sheet
4. Cash Flows Statement

41. Trial Balance
 Complete trial balance prior to creating
financial statements.
 Test of balances
◦ Ensures Debits = Credits
◦ Uses closing balances from the general ledger
(T-accounts)

42. Trial Balance for George’s Catering
 Debits = Credits

43. 1. Income Statement
 Shows profit or loss of a business
 Includes income and expenses
 Accounting period
◦ Usually 1 year

44. 2. The Statement of
Changes in Equity
 Changes to owner’s equity
◦ Capital
◦ Drawings
◦ Profit
 Income - Expenses

45. 3. Balance Sheet
 Whereas the income statement and statement of
changes in equity show changes over a certain
period of time, the balance sheet shows the
balances of assets, liabilities and owner’s equity
on a particular day.

46. 4. Cash Flows Statement
 A statement (report) of flows (both in and
out of the business) of cash.
 Includes
◦ Operating
◦ Investing
◦ Financing
◦ Net Increase/Decrease in cash