Table of ContentsThe Accounting cycle:.................................................................................................................................3

Steps in accounting cycle:........................................................................................................................3

Source Documents.......................................................................................................................................3

Check Stubs..............................................................................................................................................3

Purpose....................................................................................................................................................4

Cash Registers.........................................................................................................................................4

Purpose....................................................................................................................................................4

Sales Tickets............................................................................................................................................4

Purchase Invoice......................................................................................................................................4

1. The General Journal............................................................................................................................5

Column Date............................................................................................................................................5

Column Description.................................................................................................................................5

Column Posting Reference.......................................................................................................................5

Column Debit Amount..............................................................................................................................5

Column Credit Amount............................................................................................................................5

Purpose of General Journal.....................................................................................................................5

Journalizing..............................................................................................................................................5

2. Posting Journal Entries to Ledger Accounts........................................................................................6

3. Trial Balance.......................................................................................................................................6

4. End of Period Adjustments..................................................................................................................6

Purpose of adjust the trial balance:.........................................................................................................6

The Adjustments of the Worksheet..........................................................................................................7

Adjusting for Supplies Used..........................................................................................................7

Adjusting for Prepaid Insurance...................................................................................................7

Adjusting for Wages....................................................................................................................7

Depreciation Expense...................................................................................................................8

Adjusting for Depreciation...........................................................................................................8

5. Worksheet............................................................................................................................................9

Purpose of Worksheet:............................................................................................................................9

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Format:....................................................................................................................................................9

1-Trial balance...................................................................................................................................10

2-Adjustments:..................................................................................................................................10

3-Adjusted trial balance:....................................................................................................................10

4-Income Statement:.........................................................................................................................10

5-Balance sheet.................................................................................................................................10

6. Financial statement:..........................................................................................................................11

Income Statement.................................................................................................................................11

Balance Sheet........................................................................................................................................12

7. Closing Entries..................................................................................................................................12

8. The Post-closing Trial Balance.........................................................................................................13

Purpose of Post-Closing Trial Balance....................................................................................................13

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The Accounting cycle:The step involved in the accounting for all the business activities during an accounting period are called the accounting cycle. The cycle begins with the analysis of source documents and ends with a post-closing trial balance. A brief summary of the steps in the cycle follows:

Steps in accounting cycle: Analyze source documents Journalize the transaction. Post to the general ledger accounts. Prepare a trial balance. Determine and prepare the needed adjustment on work sheet. Complete an end of period work sheet. Journalize and post the adjusting entries. Prepare the income sheet, balance sheet, a statement of Owners equity. Journalize and post the closing entries. Prepare a post closing trial balance.

Steps 4 through 10 in the preceding list are perform as of the last day of the accounting period. This does not mean that they are actually done on the last day. The accountant may not be able to do any of these things until the first few day of the next period. Nevertheless, the work sheet statements, and entries are prepared as of the closing date.

Source DocumentsAll most all the documents that provide information about a business transaction can be called a source document. A source documents triggers the analysis of what happened. It begins the process of entering transaction in the accounting system. These source documents provide information that is useful in determining the effect of business transactions on specific accounts.In addition to serving as input for transaction analysis, source documents serve as the objective evidence of business transaction. If anyone questions the accounting records, these documents may be used as objective, variable evidence of the accuracy of the accounting records. Having objective, verifiable evidence that a transaction occurred is an important accounting concept.Source documents can be of many types. Some of them are as follow:

Check stubs or copies of checks Receipt stubs, copies of receipt, cash register tapes, or memos of cash register totals Copies of sales ticket or sales invoices issued to customer or clients Purchase invoices from suppliers

Check StubsA check's portion retained as a record by the check writer, for account keeping purposes, such as the stub part of a payroll check. It shows the out flow of cash.The stub has an area for payments to date and information about the current paycheck. It may write or it may a carbon copy of the check. When the check is written, a stub is also usually written.

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PurposeIt is kept for record keeping purposes.

Cash RegistersElectronic devices used to calculate financial transactions. Most cash registers consist of a keyboard that is used to input entries, a scanner of some sort, a drawer that is used to hold cash, and a printing device for receipts. With the advancement of technology, cash registers are able to do a wide variety of additional functions including credit card processing, personal check verification, and inventory tracking. It shows the out flow and in flow of cash.

PurposeFrom it you can check for mistakes or keep track of what you spent (especially if you pay cash). It is also you’re only proof that you actually paid for the merchandise when you leave the store, or if you need to return defective merchandise.

Sales TicketsA sales invoice can be simply defined as the request of payment by the customer for goods sold or services provided the seller.An invoice generally lists the description and the quantity of the item sold or service provided. The document is also a record of the sale for both the seller and the buyer. It shows the inflow of cash

Purchase InvoiceA commercial documents or bill presented to a buyer by a seller or service for payment within a stated time frame that indicates what has been purchased, in what amount and for what price. A purchase invoice can be used to prove that something was bought and how much was paid for it.

Electronic Source DocumentsWith the ability to go shopping in cyberspace, more transactions are being initiated electronically. Even Best Buy, known for its low prices and excellent in store services, has online shopping at http://www.bestbuy.com. Customers can place orders and these orders can be filled, all based on electronic communications. This means that more and more source documents will be in electronic form.

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1.The General JournalA day by day listing of the transaction of business is called a journal.A journal is commonly refers to as a book of original entry because it is here that the first formal accounting record of a transaction is made. Although many types of journals are used in business, the simplest form is a two column general journal. Any kind of a business transaction may be entered into a general journal. A two column general is so-named because it has two account columns, one for debit account and one for credit accounts. Journal pages are numbered in the upper right hand corner.There are five columns in a two column general journal:

Column DateThe year is entered in small figures at the top of the column immediately below the column heading. The year is repeated only at the top of the new page. The month is entered for the firstly entry on the page and for the first transaction of the month. The day of the month is recorded for every transaction, even if it is the same as the prior entry.

Column DescriptionThe description or explanation column is used to enter the titles of the accounts affected by oach transaction and to provide a very brief description of the transaction. Each transaction affects two or more accounts. The accounts or accounts to be debited are entered first at the extreme left of the column. The account or accounts to be credited are listed after the debits and indented. The description should be entered immediately following the last credit entry with an additional indentation.

Column Posting ReferenceNo entries are made in the posting reference column during journalizing. Entries are made in this column when the debits and credits are copied to the proper accounts in the ledger.

Column Debit AmountThe debit amount column is used to enter the amount to be debited to an account. The amount should be entered on the same line as the title of that account.

Column Credit AmountThe credit amount column is used to enter the amount to be credited to an account. The amount should be entered on the same line as the title of that account.

Purpose of General JournalThe purpose of a journal is to provide a record of all transactions completed by a business. The journal shows the date of each transaction, title of the accounts to be debited and credited, and the amounts of the debits and credits.

JournalizingEntering the transactions in a journal is called journalizing. For every transaction, the entry should include the date, the title of each account affected, the amounts, and a brief description.

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2.Posting Journal Entries to Ledger AccountsThe second step of accounting cycle is to post the journal entries to the ledger accounts.The journal entries recorded during the first step provide information about which accounts are to be debited and which to be credited and also the magnitude of the debit or credit. The debit and credit values of journal entries are transferred to ledger accounts one by one in such a way that debit amount of a journal entry is transferred to the debit side of the relevant ledger account and the credit amount is transferred to the credit side of the relevant ledger account.

After posting all the journal entries, the balance of each account is calculated. The balance of an asset, expense, contra-liability and contra-equity account is calculated by subtracting the sum of its credit side from the sum of its debit side. The balance of a liability, equity and contra-asset account is calculated the opposite way i.e. by subtracting the sum of its debit side from the sum of its credit side.

3.Trial BalanceAn Adjusted Trial Balance is a list of the balances of ledger accounts which is created after the preparation of adjusting entries. Adjusted trial balance contains balances of revenues and expenses along with those of assets, liabilities and equities. Adjusted trial balance can be used directly in the preparation of the statement of changes in stockholders' equity, income statement and the balance sheet. However it does not provide enough information for the preparation of the statement of cash flows. The format of an adjusted trial balance is same as that of unadjusted trial balance.

4.End of Period Adjustments Throughout the accounting period business transactions are entered in the accounting system. These transactions are based on exchange between the business and other companies. During the accounting period, other changes occur that effect business’s financial condition. For example equipments are wearing out, prepaid insurance and supplies are being used up and employee’s wages that have not yet been paid Adjustments are made at the end of the accounting period for items that do not involve exchanges with an outside party.

Purpose of adjust the trial balance: There are the following major reasons for adjusting the trial balance at the end of year:1-To report all revenue earned during the accounting period.2- To report all revenue that earned in accounting period.3- To accurately report the assets on the balance sheet. As some assets used up during the accounting period.4- To report the liabilities on the balance sheet. Expense may have been incurred that not yet have been paid.

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The Adjustments of the Worksheet

These four accounts will be used for the adjustments:

1-Supplies2-Prepaid Insurance3-Wages Expense4-Depreciation Expense

These adjusting entries are first entered in the Adjustments section of theWorksheet. Example of Adjusting Entries:

Adjusting for Supplies UsedIt is not practical to make entry for supplies expense each time supplies are used so at the end we do entry that debit Supplies Expense and credit Supplies. You are taking the amount of supplies used out of Supplies and put it in Supplies Expense.

Example:ABC Company began the month with $2000 in supplies. At the end of the month, $1,500 in supplies remained. What dollar amount of supplies was used during the month?$2,000 - 1,500 = $500

Supplies Expense 500 Supplies 500

Adjusting for Prepaid Insurance It is not practical to make entry for Prepaid Insurance Expense as insuranceexpires with the passage of time the asset should be reduced and an expense recognized ,we do entry that debit Insurance Expense and credit Prepaid Insurance.

Example:ABC Company 200 premium covers 8 months the cost of the expired coverage for June is $25($200/8 months).

Insurance Expense 25 Prepaid Insurance 25

Adjusting for Wages

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This entry is made for wages that have not been yet paid. The additional wages expense must be recognized. Since the employees have not yet been paid, Wages Payable, a liability established. Thus Wages Expense is debited and Wages Payable is credited for that not has been paid.

Example:ABC Company paid part-time employee $600 on June 27. Since then, they have earned an additional $60, but have not yet been paid.

Wages Expense 60 Wages Payable 60

Depreciation Expense Depreciation is the process of allocating the cost of long-term assets over theiruseful lives. In November, ABC Company purchased equipment for $35,000.An adjustment must be made to transfer part of the cost of the equipment to an expense account. The cost of a long-term asset such as equipment is not recorded as an expense at the time of purchase. Instead the cost is recorded as an asset and charged to expense over the time the asset is used for the business. This expense is called depreciation.

There are several methods to calculate depreciation. Mostly we uses the straight-line method.Straight-line depreciation (S/L) allocates an asset’s cost in equal amounts to eachaccounting period of its useful life.

S/L depreciation = (Cost - salvage value) / Estimated months of useful life Salvage value is an estimate of the amount that may be received by selling ordisposing of an asset at the end of its useful life.

Example:ABC Company purchased equipment in November, 2004.· Cost = $35,000· Useful life = 5 yrs or 60 months (5 yrs x 12 months)· Salvage value = $0

What dollar amount of depreciation expense should be recorded for the month?($35,000 - $0) / 60 months = $583

Adjusting for DepreciationAs the cost of the equipment is gradually transferred to expense, its recorded valueas an asset must be reduced. This cannot be carried out by directly decreasing the balance in the asset account. Instead of decreasing the asset account directly, the adjustment for depreciation is recorded in a contra account named Accumulated Depreciation—Equipment.

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Asset account has a normal debit balanceContra asset account has a normal credit balance

Example:ABC Company must make an adjustment for $583 depreciation on theequipment.

DR. Depreciation Expense— Equipment 583 CR. Accumulated Depreciation—Equipment 583

When all adjustments are entered, total and rule the Adjustments columns.

5.Worksheet An accounting worksheet is a tool used to help bookkeepers and accountants complete the accounting cycle and prepare year-end reports like unadjusted trial balances, adjusting journal entries, adjusted trial balances, and financial statements.

Purpose of Worksheet:1- It can also be used for a analytical and summary tool to show how accounts were originally

posted to the ledger and what adjustments were made before they were presented on the financial statements.

2- An accounting worksheet is a tool that businesses use to balance and close out their books at the end of a period.

3- Major purpose of the worksheet is to incorporate adjustments to the closed accounts in a structured manner following a certain format.

4- Worksheets are prepared in situations where adjustments are in large number and it helps in reducing accounting and arithmetic errors in finalizing accounts.

Format:The spreadsheet typically has five sets of columns that start with the unadjusted trial balance accounts and end with the financial statements. In other words, an accounting worksheet is basically a spreadsheet that shows all of the major steps in the accounting cycle side by side.

Each step lists its debits and credits with totals calculated at the bottom. Just like the trial balances, the work sheet also has a heading that consists of the company name, title of the report, and times period the report documents. During the accounting cycle process, an accounting worksheet can be helpful to keep track of the different steps and reduce.

Steps in Work Sheet:Worksheet has a list of accounting titles as the first column then five sets of columns on the right of account titles where each set contains two sub-columns i.e. debit and credit in the following order:

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1-Trial balance The first pair of column is for trial balance. The trial balance assures the equality of debit and credit before the adjustments process begins. Listing the accounts within their proper classifications also make it easier to extend the amounts to the proper columns.

2-Adjustments:The second pair of columns is used to prepare the adjusting entries. Enter the adjustments directly in these columns. When the account is debited or credited the amount is entered on same line as name of the account and in proper account we do adjustments. As these adjustments explained earlier.

3-Adjusted trial balance:When the account balance sheet is not effected by entries in adjustments columns the amount in the trial balance is extended directly to the adjusted trial balance columns. When affected by entries the account balance to be entered in Adjusted Trail Balance Columns increases or decreases by amount of adjusting entry.

4-Income Statement:The Income statement columns shows the amount will be reported in income statement. All revenue accounts are extended to income statement Credit Column and expense accounts are extended to the income statement Debit Column.

5-Balance sheet The assets and drawing accounts are extended to Balance sheet Debit and liability, owner’s capital accounts extended to Balance sheet Credit Column. To complete worksheet we do total of all columns and debit and credit of each column must be equal

ABC Company Worksheet as on 31st December

Account Title Trail Balance Adjustments Adjusted Trial Balance

Income Statement

Balance Sheet

Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Cash 10650 10650 10650

Account receivable 6400 6400 6400

Supplies on hand 1400 500 900 900

Prepaid insurance 2400 200 2200 2200

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Prepaid rent 40000 400 39600 39600

Account payable 3130 3130 3130

Service fee received in advance

4500 1500 3000 3000

Capital stock 50000 50000 50000

Dividends (drawings) 3000 3000 3000

Service revenue 10700 2500 13200 13200

Advertising expenses 50 50 50

Gas and oil expenses 680 680 680

Salaries; expenses 3600 180 3780 3780

Utilities expenses 150 150 150

Insurance expense 200 200 200

Rent expense 400 400 400

Supplies expense 500 500 500

Depreciation 750 750 750

Accumulated Depreciation

750 750 750

Interest receivable 600 600 600

Interest revenue 600 600 600

Salaries payable 180 180 180

Service revenue receivable

1000 1000 1000

Net profit 7290 7290

Total 68330 68330 5130 5130 70860 70860 13800 13800 64350 64350

6.Financial statement:Financial statements are a structured representation of the financial performance and financial position of a business.

Income StatementIncome statement (also referred to as statement of income and expense or statement of profit or loss) is a financial statement that summaries the results of a company’s operations for a period. It

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presents a picture of a company’s revenues, expenses, gains, losses, net income and earnings per share (EPS).The income statement is one of the most important documents for an investor’s decision making. Investors can find a wealth of valuable information on the income statement including the company’s sales, profitability, retained earnings, gross profit, and operating income. From these numbers, investors can calculate and discern vital information about the company. Usually income statements provide information for more than one period, for example two consecutive years. It is easy to compare the results from one period to the next and determine trends in sales and income growth.

Balance SheetBalance sheet tells about the assets, liabilities and equity of a business at a specific point of time. It is a snapshot of a business. A balance sheet is an extended form of the accounting equation. An accounting equation is: Assets = Liabilities + EquityThe balance sheet shows what the business has (assets) and what the business owns against those assets (liabilities). The difference between the assets and the liabilities shows the net worth of the business. The net worth of the business is important to measure the financial stage of a business in future.The balance sheets how the accounting equation in a physical representation. The balance sheet also shows the owner's equity for example, it shows the value of the stock and the number of shares outstanding. The balance sheet is also used by the government agencies to make sure that the business is complying with the set laws. It also provides information to any potential lenders of the business on the creditworthiness of the business. On completion of an accurate balance sheet for your business, you will be able to determine:

Cash flow statement:A cash flow statement is the motor oil for any business finance engine. It measures the amounts of money that come into a company and out of it over a given time period. This way a company is able to keep track of how much cash it has on hand to pay expenses and buy assets. Cash flow statements use information from both income statements and balance sheets.

7.Closing EntriesClosing entries are journal entries made at the end of an accounting period which transfer the balances of temporary accounts to permanent accounts. Closing entries are based on the account balances in an adjusted trial balance.

Temporary accounts include:

1. Revenue, Income and Gain Accounts2. Expense and Loss Accounts3. Dividend, Drawings or Withdrawals Accounts4. Income Summary Account

The permanent account to which balances are transferred depend upon the type of business. In case of a company, retained earnings account, and in case of a firm or a sole proprietorship, owner's capital account receives the balances of temporary accounts.

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Income summary account is a temporary account which facilitates the closing process.

8.The Post-closing Trial BalanceThe post-closing trial balance is the last step in the accounting cycle. It is prepared after all of that period's business transactions have been posted to the General Ledger via journal entries. The post-closing trial balance can only be prepared after each closing entry has been posted to the General Ledger. The purpose of closing entries is to transfer the balances of the temporary accounts (expenses, revenues, gains, etc.) to the retained earnings account.

After the closing entries are posted, these temporary accounts will have a zero balance. The permanent balance sheet accounts will appear on the post-closing trial balance with their balances. When the post-closing trial balance is run, the zero balance temporary accounts will not appear. However, all the other accounts having non-negative balances are listed, including the retained earnings account. As with the trial balance, the purpose of the post-closing trial balance is to ensure that debits equal credits

Purpose of Post-Closing Trial Balance While each accounting period has a beginning and an end, the periods do use information from the previous period. That is why it is necessary to run a post-closing trial balance.

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