Accounting Cycle Upto Trial Balance

THE ACCOUNTING CYCLE
A DAC 501: FINANCIAL

ACCOUNTING PRESENTATION.
BY
HERICK ONDIGO
SCHOOL OF BUSINESS, UoN
The Accounting Cycle
For a new business, it begin by setting up ledger
accounts.
For an established business, begin with account
balances carried over from the previous period.
The Steps In The Accounting Cycle
1. Analyze source documents & record business
transactions in a journal
2. Post journal entries to the ledger accounts
3. Prepare unadjusted trial balance (TB)
4. Journalize and post end of period
adjustments (EOPA)
5. Prepare adjusted Trial Balance
6. Prepare /Create financial statements &
reports from data in adjusted TB
7. Journalize and post the closing entries
8. Prepare the post-closing trial balance
9. Prepare and post reversing entries

Detailed Steps in the Accounting Cycle

Analyze
Business
Transactions
.
Journalize
transactions
in the
journal.
Post entries
to the
accounts in
the ledger.
Prepare
unadjusted
trial
balance.
Prepare
financial
statements.
Post-closing
trial balance
Journalize and
post closing
entries
Journalize
and post
adjusting
entries
Prepare
adjusted trial
balance.
Analysis and Recording Business Transactions
Business transaction is an economic event that
causes a change in the financial position
Financial Position:
What the entity controls
How the entity controls them (claims)
Fundamental Accounting Equation

ASSETS = EQUITIES

ASSETS = LIABILITIES + OWNERS' EQUITY
How do we use the Accounting equation?
Recall the Basic Accounting Equation:
Assets = Liabilities + Shareholders Equity
Implications:
Total Asset=Claims against the assets
Therefore :
If assets increase : either Liabilities and/or
Shareholders should also increase and vice versa
For example: borrow cash, cash (asset) will
increase and Liabilities will increase
when it is paid back: cash (asset) will decrease
and liabilities will decrease
How do we record/Account?
An ACCOUNT (ledger Account) : is an
accounting device used to record changes in a
of a specific asset, liability or owners equity
item
Has 3 elements: title, debit side and credit side
(also called the T-Account)
Changes in the accounts are entered manually
into a book called a ledger or computerized
ledger
Basic forms of book ledgers: the two-column
account format, and the running format
account
Chart of accounts

Definition of Ledger Account
Ledger Account
Complete listing of business transactions for an
individual account
Where you look if you want to find the balance of any
given account
General Ledger
A loose-leaf book or computer file containing all the
Ledger Accounts
Each account from the chart of accounts has its own
ledger account in the general ledger
Complete listing of all account tittles and account
names/codes used by an entity is called the chart of
accounts - It is like a table of content in a book
Forms of Ledgers
Date Item Post. Ref. * Debit Date Item
Posting
Reference Credit
Account No: Account
Left-hand or Right-hand or
Debit Side Credit Side
Account Name Account No:
Two-Column Account
T-Account form that depicts the two-column account:
How do accounts behave?
Assets = Liabilities + Shareholders Equity
+ + +

So Assets increase on the left hand or debit side then
they decrease on the credit side

Assets
+ -
debit credit
Behavior of Accounts cont
Liabilities and Owners Equity accounts increase
on the credit side, decrease on the debit side
Liabilities or Owners Equity Accounts

- +

debit credit
Transaction Analysis and The Duality Concept
Double entry system states that every transactions
affects at least two accounts.
Therefore
If an asset account increases (decreases),
because of duality concept there must be a
corresponding:
1. increase(decrease) in a specific liability account
2. or a decrease(increase) in a another asset
account
3. or an increase(decrease) in owners' equity
account.

Accounting Is Fun!
What Is a General Journal?
The book in which a person enters the original
record of a business transaction
Commonly referred to as a book of original entry
Chronological listing of all the business
transactions for the company
Each listing records the debits and credits associated with
that business transaction
A book or a location on a hard drive where all
business transactions are listed
Like a diary
Whats in a Journal Entry?
1. Date
2. At least one debit entry
Debit account, use exact account title, do not indent
titles
3. At least one credit entry
Credit account, use exact account title, indent titles
4. An explanation of the transaction:
Check number
Invoice number
Accounts receivable customer name
Many other elements OR details as appropriate
Remember: the accountant must leave a good audit trail
so that users of accounting information can understand
what occurred with each transaction
DR=CR
Illustration of the accounting process
1. On Jan 1 2010 Ms.Farida invested $100,000 at the
inception of the business, Express Travel Agency
Event
No
Assets Liabilities Owners
Equity
1 +100.000 No change +100.000
Total 100.000 0 100.000
GENERAL JOURNAL Page 1
Date Account Title and Description Acct.No. Debit Credit
1 Jan 2004 Cash 100 100.000
Capital 500 100.000
Investment by the shareholders
2. On 1 January employed a full time secretary
and a sales representative.

Event No Assets Liabilities Owners Equity
1 +100.000 No change +100.000
2 No change No change No change
Total 100.000 0 100.000
3. On 1 January rented an office building and paid 3 months
rent of $600.

1 +100.000 No change +100.000
3 +600 No change No change
-600 No change No change
Total 100.000 0 100.000
1 Jan 2004 Prepaid Rent 180 600
Cash 100 600
Payment of 3 months of rent in advance
4. On 2 January office furniture and equipment is purchased for
$ 15,000 , for which $ 5,000 is paid in cash and the rest would be
paid later in January and February 2010.
1 +100.000 No change +100.000
4 +15.000 +10.000 No change
-5.000
Total 110.000 10.000 100.000
Date Account Title and Description Acct.No Debit Credit
2 Jan 2004 Furniture and Equipment 255 15.000
Cash 100 5.000
Accounts Payable 320 10000
Purchase of furniture and equipment
5. On 3 January insured the office building and the equipment
effective from 1 January to 31 December 2010 and paid $ 120
for the whole period.
1 +100.000 No change +100.000
4 +15.000 +10.000 No change
-5.000
-120
Total 110.000 10.000 100.000
3 Jan 2004 Prepaid Insurance 180 120
Cash 100 120
Purchase of insurance policy
6. On 5 January the company signed an agreement with
Keya Airline to sell their airline tickets and receive
commissions in return.
1 +100.000 No change +100.000
4 +15.000 +10.000 No change
-5.000
-120
Total 110.000 10.000 100.000
7. On 10 January Express Travel Agency borrowed $15,000 from
the bank at an annual interest rate of 24% for six months. The
principal and the interest of the loan will be paid together on 10
July 2010.
1 +100.000 No change +100.000
4 +15.000 +10.000 No change
-5.000
-120
7 +15.000 +15.000 No change
Total 125.000 25.000 100.000
7. On 10 January Express Travel Agency borrowed $ 15,000 from the
bank at an annual interest rate of 24% for six months. The principal
and the interest of the loan will be paid together on 10 July 2010.

10 Jan 2004 Cash 100 15.000
Bank Loan 300 15.000
Borrowing from the bank
8. On 10 January purchased office supplies for $2.500 in cash.

1 +100.000 No change +100.000
4 +15.000 +10.000 No change
-5.000
-120
7 +15.000 +15.000 No change
8 +2.500 No change No change
-2.500
Total 125.000 25.000 100.000
8. On 10 January purchased office supplies for $2,500 in cash.

10 Jan 2004 Office Supplies 136 2.500
Cash 100 2.500
Purchase of office supplies
9. During the first half of January the agency sold tickets to various
customers and on 16 January issued a commission invoice to clients
amounting to $5,000 that will be collected later in January 2010.

1 +100.000 No change +100.000
4 +15.000 +10.000 No change
-5.000
-120
7 +15.000 +15.000 No change
-2.500
9 +5.000 No change +5.000
Total 130.000 25.000 105.000
9. During the first half of January the agency sold tickets to various
customers and on 16 January issued a commission invoice to clients
amounting to $ 5,000 that will be collected later in January 2010.

Left or Debit Side Right or Credit Side
Decrease Increase
Revenue Accounts
16 Jan 2004 Accounts Receivable 120 5.000
Commission Revenue 600 5.000
Recognition of commission on ticket sales
10. On 20 January the company paid $5,000 for the furniture and
equipment that were purchased on 2 January.

1 +100.000 No change +100.000
4 +15.000 +10.000 No change
-5.000
-120
7 +15.000 +15.000 No change
-2.500
9 +5.000 No change +5.000
10 -5000 -5000 No change
Total 125.000 20.000 105.000
10. On 20 January the company paid $5.000 for the furniture and
equipment that were purchased on 2 January.

20 Jan 2004 Accounts Payable 320 5.000
Cash 100 5.000
Payment for an accounts payable
11. On 22 January received $7,500 from a customer for organizing the
accounting conference that will be held on February 2, 2010.

1 +100.000 No change +100.000
4 +15.000 +10.000 No change
-5.000
-120
7 +15.000 +15.000 No change
-2.500
9 +5.000 No change +5.000
10 -5.000 -5.000 No change
11 +7.500 +7.500 No change
Total 132.500 27.500 105.000
11. On 22 January the company received $7.500 from a customer for
organizing the accounting conference that will be held on 2 February 2010.

22 Jan 2004 Cash 100 7.500
Unearned Revenues 340 7.500
Receipt of advance payment from a customer
12. The company received the full payment of commission charged to
Kenya Airlines of $ 5.000 on 23 January.

1 +100.000 No change +100.000
4 +15.000 +10.000 No change
-5.000
-120
7 +15.000 +15.000 No change
-2.500
9 +5.000 No change +5.000
10 -5.000 -5.000 No change
11 +7.500 +7.500 No change
-5.000
Total 132.500 27.500 105.000
12. The company received the full payment of commission charged to
Kenya Airline s of $ 5,000 on 23 January.

23 Jan 2004 Cash 100 5.000
Accounts Receivable 120 5.000
Receipt of payment from a customer
13. On 24 January paid salaries of $ 9,000 employees in cash.

7 +15.000 +15.000 No change
-2.500
9 +5.000 No change +5.000
10 -5.000 -5.000 No change
11 +7.500 +7.500 No change
-5.000
13 -9.000 No change -9.000
Total 123.500 27.500 96.000
13. On 24 January paid salaries of $ 9,000 employees in cash.

Increase Decrease
Expense Accounts
24 Jan 2004 Salary Expense 770 9.000
Cash 100 9.000
Payment of salaries
14. During the second half of January the agency sold tickets to various
customers and on 31 January issued a commission invoice to Kenya
Airline amounting to $ 7,500 which will be collected in February 2010.

-2.500
9 +5.000 No change +5.000
10 -5.000 -5.000 No change
11 +7.500 +7.500 No change
-5.000
13 -9.000 No change -9.000
14 +7.500 No change +7.500
Total 131.000 27.500 103.500
14. During the second half of January the agency sold tickets to various
customers and on 31 Jan sent an invoice to Kenya Airline amounting to
$7,500 which will be collected in February 2010

31 Jan 2004 Accounts Receivable 120 7.500
Commission Revenues 600 7.500
Recognition of commission on ticket sales
15. Ms. Farida ( the proprietor) withdrew $ 3,000 on 31 January
for her personal use.

7 +15.000 +15.000 No change
-2.500
9 +5.000 No change +5.000
10 -5.000 -5.000 No change
11 +7.500 +7.500 No change
-5.000
13 -9.000 No change -9.000
14 +7.500 No change +7.500
15 -3.000 No change -3.000
Total 128,000 27,500 100,500
15. Ms. Farida withdrew $ 3.000 on 31 January for personal use.

Increase Decrease
Owners' Withdrawals or Dividends
31 Jan 2004 Withdrawals XXX 3,000
Cash 100 3,000
Withdrawal by the owner
Summary of Journalizing
Steps:
1. Determine the effects of transactions on
three components of the accounting
equation,
2. Determine which specific accounts are
affected, and
3. Assure that total of the increases should
be equal to either increases on the other
side of the equation or to decreases on the
same side, or a combination there of.

Behavior of Accounts- Summary
Assets = Liabilities + Owners Equity
+ - - + - +
Dr Cr Dr Cr Dr Cr
Expense Revenue
+ - - +
Dr Cr Dr Cr

Withdrawals/Dividends
+ -
Dr Cr
Accounting Cycle-Revisited
Analyze and
record the
transactions
Post the
transactions and
prepare trial
balance
Adjust the
accounts
and prepare
trial balance
Close the
accounts and
prepare trial
balance
Prepare the
financial
statements
Posting -Defined
The process of transferring figures
from the journal to the ledger accounts
It simply involves transferring data
from one accounting entry into another
The purpose is to classify and
summarize transactions and events
affecting specific elements of the
financial statements

Four-Step Posting Process
1. Transfer transaction date to accounts date column
2. Transfer the debit/credit amount and calculate the
new balance
3. Write journal page number in posting reference
column of ledger as a cross-reference
4. Go back to journal and write account number in
posting reference column of journal as a cross-
reference
Cross-reference
The ledger account number in the Post. Ref. column
of the journal and the journal page number in the
Post. Ref. column of the ledger account

Posting to The Ledger illustrated
1 Jan 2004 Cash 100 100.000
Capital 500 100.000
Investment by the shareholders
LEDGER - Cash Acc. No. 100
Date Description Ref Debit Credit Debit
Balance
Credit
Balance
1 Jan 2004 Capital P 1 100,000 100,000
LEDGER - Capital Acc. No. 500
Date Description Ref Debit Credit Debit
Balance
Credit
Balance
1 Jan 2004 Cash P 1 100,000 100,000
LEDGER - Cash Acc. No. 100
Date Description Debit Credit
1 Jan Capital 100,000
1 Jan Office rent 600
2 Jan Office furniture and equipment 5,000
3 Jan insurance expense 120
10 Jan Bank loan 15,000
10 Jan Office supplies 2,500
20 Jan Accounts payable 5,000
22 Jan Unearned Revenue 7,500
23 Jan Acccounts Recievable 5,000
24 Jan salaries expense 9,000
31 Jan Withdrawal 3,000
Posting illustrated
Exercise
Post all the above transactions (journal entries)
to the following ledger accounts:
Prepaid Rent, Office supplies, Prepaid insurance, Office
Furniture & Equipment, Bank loan, Accounts Payable,
Unearned Revenue, Capital, Withdrawals, Commission
Revenue, & Salary Expense
Cast the ledger accounts
Determine the balances carried down (Bal c/d)
and balances brought down (b/d)
Prepare a summary of the ledger balances in a two
columnar listing to derive the Trial Balance( TB)

Category of the Account Increase Recorded
By
Normal Balance
Assets Debits Debit
Liabilities Credits Credit
Shareholders Equity
Capital Credits Credit
Dividends or Withdrawals Debits Debit
Revenues Credits Credit
Expenses Debits Debit
SUMMARY -Normal Balances of Accounts
Preparing a Trial Balance
List the ledger account balances
in two columns on the trial
balance
Left column = Debits
Right column = Credits
Trial balance proves DR = CR

The Balancing of Accounts, The Trial Balance &
Financial statements
Introduction:
In the previous exercise , you have learned the principles
of double entry and how to post to the ledger accounts. The
next step in our progress towards the financial statements is
the trial balance.
Before transferring the relevant balances at the year end to the
financial statements, it is usual to test the accuracy of the
double entry bookkeeping records by preparing a trial balance.
This is done by taking all the balances on every account. Due
to the nature of double entry, the total of the debit balances
will be exactly equal to the total of the credit balances.

The Balancing of Accounts & The Trial Balance
Question: Once you have closed all the accounts, what would
do?
Answer: Prepare a Trial Balance
Question: What is a Trial Balance then? What is it for? How
does it look like?
Answer: A Trial Balance is a list of nominal ledger account
and their balances at a given date. It is usually
prepared on the last day of the accounting period.
It consists of a Debit and a Credit balance.
Its purposes:
(1) It is prepared to check that the total of debit balances is the
same as the total of credit balances and offer reassurance that the
double entry recording from day books has been done correctly.
(2) For preparation of statement of income and the statement of
financial position
The rules to prepare the Trial Balance:

Total Debit Entries = Total Credit Entries

Debit Credit
Assets
Expenses
Drawings
Income/ Revenue
Liabilities
Capital
Steps to preparing the Trial Balance:

1) Balance/cast ALL the ledger accounts in the books.

2) List all the Debit balances on the debit side and add them up.

3) List all the Credit balances on the credit side and add them up.

4) Ideally the trial balance should balance after step 3
What if the trial balance shows unequal debit and credit
balances?
If the columns of the trial balance are not equal, there must be
an error in recording or processing the transactions.
4 Errors revealed by the trial balance:
The errors revealed are those errors which cause the Trial
Balance totals to disagree. (i.e do not balance)
There are FOUR types of errors revealed by a trial balance:
1) Posting to the wrong side of an account.
2) Errors in calculation and balancing
3) Incorrect amounts entered on one entry
4) Omission of one entry.

Question: How do we locate all of the above errors?

Answers: 1) Check day-book (journal) totals
2) Check additions of Ledger accounts, ensure
each balance is correct
3) Check all ledger account balances have been
recorded in the Trial Balance.
4) Check all balances have been entered in the
Trial Balance on the correct side.
5) Check additions have been done correctly

The Balancing of Accounts,& The Trial Balance

Question: Once you are sure there is no mistake made in the
Trial Balance, what do you do in the next step?

Answers: Prepare End of Period Adjustment & then prepare
the following statements:
1) Statement of Income
2) Statement of Financial Position

In short, these are the steps:
1) Trial Balance
2) End of Period Adjustments
3) Statement of Income
4) Statement of Financial position

However, a trial balance will not disclose the following types
of errors: (Errors not revealed by the trial balance)

1) Errors of omission
Complete omission of a transaction, because neither a
debit nor a credit is made.

2) Errors of commission
This happens when original figure incorrectly
entered. (Correct double entries but incorrect amounts
were recorded)

3) Compensating errors
This happens where errors cancel out each other. (eg an
error of 100 is exactly cancelled by another 100 error
elsewhere).
4) Errors of principles
This happens when the wrong type of account had been
used (eg the purchase of a motor van is debited to a
expense account, such as motor expenses, rather than a
fixed asset account)
5) Complete reversal of entries
This happens when an account should be debited but was
credited (and vice versa)

The Trial Balance
Accounts Debit Credit
Cash 102,280
Accounts Receivable 7,500
Office Supplies 2,500
Prepaid Rent 600
Prepaid Insurance 120
Office Furniture and Equipment 15,000
Bank Loan 15,000
Accounts Payable 5,000
Unearned Revenues 7,500
Capital 100,000
Withdrawal 3,000
Commission Revenues 12,500
Salary Expenses 9,000
Total 140,000 140,000
Express Travel Agency
Trial Balance
31-Jan-10
in $
THE END
THANK YOU

Accounting Cycle Upto Trial Balance

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THE ACCOUNTING CYCLE

A DAC 501: FINANCIAL

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