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The Accounting Cycle

1) Key Things To Know 5) Medium Practice Test
2) Self Test 6) On Your Test
3) Practice as You Learn 7) Quick Study Sheet
4) Easy Practice Test  

 

 

Key Things to Know

 The accounting cycle is:
 
            1)  Record transactions as journal entries
 
                        See recording transactions on a spreadsheet and recording journal entries
                           for further discussion
 
           
            2)  Post amounts in “T” accounts for each account and balance the “T” account
                       for each account to get the ending balance
 
                        See the section on journal entries for further discussion
 
 
            3)  Prepare an unadjusted trial balance.  This is done before making adjustments
                      so that you can see what accounts need adjusting.
 
                        The unadjusted trial balance will have 3 columns and debits must = credits
 
                                    Account Name         Debit $ amount                     Credit $ amount
                                   
                        Assets and expense amounts go in the debit column
                        Liabilities, owner’s equity, and revenue amounts go in the credit column
                           Contra asset accounts go in the credit column                      
 
            4)  Record adjusting journal entries
 
                   Entries made to adjust to the accrual basis – make sure the matching
                    principle is followed – revenues when earned and expenses when incurred
                       
                        See adjusting journal entries for further discussion
 
            5)  Post the amounts from adjusting journal entries in the “T” accounts and get a
                    new final balance for each account.  This is the final balance.
 
 
            6)  Prepare an adjusted trial balance
 
                        This will have 3 columns and will show the final amounts that will be
                          reported on the financial statements.  Debits must = credits
 
                                    Account Name         Debit $ amount                     Credit $ amount
                                   
                        Assets and expense amounts go in the debit column
                        Liabilities, owner’s equity, and revenue amounts go in the credit column
                           Contra asset accounts go in the credit column                      
 
 
            7)  Prepare an income statement
                       
                        Put all revenue, expense, gain, and loss accounts on the adjusted trial
                         balance on the income statement in proper format.
 
           
            8)  Close all temporary accounts only – accounts reported on the income
                  statement and the dividends paid account
 
                        The income statement is for a period of time.  Income statement accounts
                        must start at 0 at the beginning of each year.
 
                        At the end of each period, income statement account balances are
                           transferred to retained earnings so they can begin at 0 next period.
 
                        Dividends are paid out of retained earnings.  You must also transfer the
                          dividends paid account to retained earnings so it can begin at 0 also
 
                        Retained earnings is the accumulated profit or loss less dividends paid
                        Revenue – expenses + gains – losses = profit or loss
 
                                    See below for detail closing journal entries
 
 
            9)  Prepare a post closing trial balance – this will show balance sheet accounts
                only and retained earnings will include this year’s earnings and dividend paid.
 
            10)  Prepare the balance sheet.  Put the account names and the amounts for
                   assets, liabilities, and owner’s equity on the balance sheet in proper format.
 
 
 
Trial Balance:   a list of all individual accounts in the left columns with two columns for
                          the debit balance and the credit balance to the right of the account list.
 
                                    The total of all debits must equal the total of all credits.
                                         This means the accounts are in balance.
                                    It does not mean that all journal entries made were correct – wrong
                                     amounts and wrong accounts could have been used and the
                                     trial balance can still balance when debits equal credits for each
                                         individual journal entry.
 
                        Assets & Expenses must have debit balances
                        Liabilities & Owner’s Equity & Revenues must have credit balances
                                    Contra asset accounts have a credit balance
                                    Dividends paid has a debit balance
                                   
 
 
Permanent or Real Accounts:    Balance sheet accounts do not start over at the
                                                         beginning of a period
 
                                                            The balance sheet reports what you have and owe
                                                          at a particular point in time
 
                                                            Assets and Liabilities do not go away when a new
                                                        period starts.   These accounts have beginning
                                                        balances and as transactions occur, the balances
                                                        change.
 
 
 
Temporary or Nominal Accounts:    Income statement accounts that are used to
                                                              record transactions for a certain period of time.
 
                                                              These accounts must start over at the beginning of
                                                            each period so that the amounts in the account
                                                            is for this period only.
 
                                                               The net of these accounts – rev,exp,gains,losses-
                                                                  is transferred to retained earnings at the end of
                                                            the period.  (See step 8 in the process)
 
 
 
Closing Entry:   Transfers income statement accounts – revenues, expenses, gains,
                              and losses and dividends paid to the retained earnings account.
 
                      You must list all expense, loss and dividends paid accounts as a credit.
                      The retained earnings $ amount is the total of all credit amounts
 
                                    An expense and loss has a debit balance.  You must credit it
                                   for the same amount to make the balance go to 0.
 
 
                                    Retained earnings                           $XXXXX
                                                _____expense                                  $XXX
                                                _____ expense                                 $XXX
                                                _____ expense                                 $XXX 
                                                _____ expense                                 $XXX
                                                cost of goods sold                            $XXX
                                                loss on sale                                       $XXX
                                                Dividends paid                                 $XXX
 
 
 
                        You must list all revenue and gain accounts.  The retained earnings
                        $ amount is the total of all debit amounts.
 
 
 
                                    A revenue and gain has a credit balance.   You must debit it
                                    for the same amount to make the balance go to 0.
 

                                    Sales                                   $XXX
                                    Interest Income                    $  XX
                                    Dividend Income                  $  XX
                                    Service Revenue                 $XXX
                                    Gain on sale                        $  XX
                                                Retained earnings                           $XXXX
 

 

 


 

 

 

 
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