ACCOUNTING CYCLE

STEPS IN ANALYZING TRANSACTION

1. Read the transaction to understand what is happening and how it affects the business. Example, the business has more Revenue, or has more Expenses, or has more Cash, or Owes less to Creditors.
2. Identify the accounts involved, and decide whether the accounts are increased or decrease. Look for Cash first; you will quickly recognize if Cash is coming in or going out.
3. Decide on the Classifications of the accounts involved. (for Example, Equipment is something the business owes, and it's a liability; Rent is an Expense.
4. After recording the transaction, make sure the accounting equation is in balance.

THE FIVE CLASSIFICATIONS:
Accounts Category Normal Balance Increase Decrease
1. ASSETS DEBIT DEBIT CREDIT
2. LIABILITIES CREDIT CREDIT DEBIT
3. OWNER'S EQUITY
CAPITAL CREDIT CREDIT DEBIT
WITHDRAWALS DEBIT DEBIT CREDIT
4. REVENUE CREDIT CREDIT DEBIT
5. EXPENSES DEBIT DEBIT CREDIT

STEPS IN THE ACCOUNTING PROCESS
1. Record the transactions of a business in a JOURNAL book of original entry - the day - by day record of the transactions of a firm). Entry should be based on some source document or evidence that a transaction has occurred, such as an invoice, a receipt, or a check.
2. Post entries to the accounts in the LEDGER. Transfer the amounts from the JOURNAL to the Debit or Credit column of the specified accounts in the LEDGER. Use a cross reference system. Accounts are placed in the LEDGER according to the account numbers assigned to them in the CHART OF ACCOUNT.
3. Prepare a TRIAL BALANCE. Record the balances of the LEDGER accounts in the appropriate Debit or Credit column of the Trial balances form. Prove that the total of the debit balances equals the total of the credit balances.
RECORDING BUSINESS TRANSACTION
To repeat Business transactions are events that have a direct effect on the operations of an economic unit or enterprise and are expressed in terms of money. Each business transaction must be recorded in the accounting records. As one records business transactions, one has to change the amounts listed under the headings Assets, Liabilities, and Owners Equity. However, the total of one side of the fundamental accounting equation should always equal the total of the other side.
SUMMARY OF TRANSACTIONS
Summarizing each individual ledger account and listing these accounts and their balances to test for accuracy in recording the transactions.
1. Name of the company
2. Title
3. Date
4. Account Name (In order - Chart of Account)
5. Two Column Debit - Credit
CHART OF ACCOUNTS
A numbering system of accounts that list account titles and accounts numbers to be used by a company.
Before recording transactions for new business, the accountant must first think of all the possible types of transactions that the company will carry out. Based on this variety of possible transactions, the company's accountant makes a list of account titles to be use to record the company's transactions.
Chart of Account - Is the official list of the ledger accounts in which transactions of a business are to be recorded. Assets are listed, Liabilities, Owners Equity, Revenue, and Expenses.
.

Owners Equity

Owners Equity - represents the amount owed to the owners by the company. It is calculated by subtracting Liabilities from each side of the accounting operation. Owners Equity also represents the net asset of the company.

Ownership - Is the exclusive right to posses, use, enjoy, and dispose of property.

Equity - Is the owners' contribution to the business. It is represents the noncurrent obligations of the entity to the owners,. Because equity equals the amount of assets remaining after subtracting liabilities, equity is sometimes called net assets. (The term 'net' indicates that at least one amount has been subtracted from another to reach this final amount.) Equity comes from two primary sources investments by owners and earnings. An unincorporated business (sole proprietorship or partnership) will be illustrated first. Equity is equal to the owners' investments plus net income, less any withdrawals and net losses.

Capital - The owners' current investment, or equity, in the assets of a business.

Drawing Account - A temporary capital account, set in the name of the sole proprietor or a partner, from which he or she can withdraw money or other assets in anticipation of profit.

BASIC ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER'S EQUITY


ASSETS - Properties (Resources) of value owned by a business.

1. It must be owned by the organization, and
2. It must have money value.

Money Value - Exist if a buyer is willing to pay money to a seller for the property.

TYPES OF ASSETS

ASSETS

1. Current Assets: Are cash and non cash assets that are readily converted to cash and are available to pay current liabilities, or non cash assets that are consumed in operations within one year or the operating cycle, whichever is longer. There are several traditional accounts that are classified as current assets on the balance sheet.
CASH - An asset consisting of coins, bills, money orders, Checks, Certificates of deposit, or treasury bills
Fixed deposits receipts - For certain periods - 1 year.
Treasury bills - Issued by the government.
Notes Receivable - Written promises in the hands of the creditors, that serve as evidence of debts
Accounts Receivable - A current asset for which an oral promise to pay, made by the customer, serve as evidence. Accounts used to record the amounts owed by charge customers (legal claims against charge customer).
Note: performed services or sales item.
Merchandise Inventory - Represents the value of goods on hand, either at the beginning or end of the accounting period.
Accounting Period - The period of time, no more than 1 year, covered by the three financial statements.
Supplies - One type of asset acquired by a firm; has much shorter life than equipment. Such as pencil, stationery, etc.
Prepaid Expense - An asset account an item that normally is considered to be an expense but, because it is paid in advance, is classified as an asset. When the value of the asset has been used up, an adjusting entry will convert this prepaid expense (asset) to an actual expense. Such as insurance policies and rent paid in advance.
2. Fixed Assets: An asset that has an expected useful life of 1 year or more. Fixed assets are also referred to as "plant assets" or "property, plant and equipment."
Property, Plant, and Equipment Assets - That have a useful life of more than 1 year and are used in the continuing operations of the organization.
Property - Which a person owns; possession; such as Land, or Land and Building.
Plant - The machinery, etc., used in an industrial process, etc.: The farm has its own lighting. (ex. generator)
Equipment (Office) - Such as typewriter, computer, fax machine, Xerox. etc.
Furniture and Fixtures - Such as desk, chair, cabinet, chair, etc.
Automobile Equipment - Such car, truck, for transportation.

LIABILITIES

Liabilities - Debts, amounts owed to creditors
1. Current Liabilities - Liabilities that will be paid with current assets within one year or one operating cycle, whichever is longer.
Accounts Payable - Amounts owed creditors that result from the purchased of goods or services on account.
Notes Payable - Written promises in the hands of the makers, that serve as evidence of debts. If due within one year or one operating cycle, whichever is longer.
Interest Rate Payable - A percentage of the principal that is paid for the use of money borrowed.
Interest - Money paid for the use or borrowing of money.
Unearned Revenue - Advance payment for services that still must be performed. Unearned revenue represents a liability or obligation of the company receiving the payment for a service not yet rendered.
2. Non Current Liabilities - In general liabilities that have a due date more than a year beyond the balance sheet date or beyond one operating cycle, whichever is longer, are classified as non current source is considered non current, whatever the due date. There are several accounts that are classified as noncurrent liabilities, such as mortgages payable, Bonds Payable, Long-term Notes Payable.

What is Accounting, Accountant, Bookkeeper, and Computer?

ACCOUNTING

Accounting - Is the process of Analyzing, Classifying, Recording, Summarizing and Interpreting business transaction in financial or monetary terms.

ACCOUNTANT

Accountant - Takes that information and prepares the financial reports that are used to analyze the company's financial position.

BOOKKEEPER

Bookkeeper - An individual who earns a living by recording the financial activities of a business and who is concerned with the techniques involving the recording of the transactions.

COMPUTER

Computer - Is taking over the acccounting's job of completing financial reports. It is important to understand that the computer is only a tool that is doing the routine bookkeeping operations that previously took days or months to complete.