Chapter 3

The Accounting Cycle

1) Accounting Cycle is the sequence of accounting procedures used to record, classify, and summarize accounting information in financial reports.

2) The Accounting Cycle generally consists of 8 specific steps, in this chapter we will be talking only about three of them:

Journal

Ledger

Trial balance 

3) The role of Accounting Records

Establishing accountability for the assets and/or transactions unders individual's controle

Keeping track of routine business activities

Obtaining detailed information about specific transactions

Evaluating the efficiency and performance of various departmens within the organization

4) The ledger account or simply the account is a means of accumulating in one place all the information about changes in specific financial statments items. The sipmlest form of an account is when it has only:   a title; a left side called debit and a right side called credit.

5) The entire groupe of accounts is kept together in an accouting record called a ledger.

6) Debiting and Crediting??????????????????????

Assets :  Normal Debit Balance

=

Liabilities: Normal Credit Balance

+

Owners' Equity:Normal Credit Balance

+

Revenue:Normal Credit Balance

-

Expenses: Normal Debit Balance

     Additional Information:     Dividends have a Normale Dabit Balance  

                                            Retained Earnings have a Normal Credit Balance

7) The balance of an account is the difference between the total of the debit and credit entries in the account.

if the debit total   >   the credit total                        the account has a debit balance

if the credit total   <   the debit total                                     the account has a credit balance

8)  " The double entry Principle " states that each transaction has to be reported to at least two accounts.  

this principle can be easly understood if we use the accounting equation:   in order to keep the equality between the two sides of the accounting equation "A=L+O.E"  each effect on the left side of the accounting equation has to be accompagned by a similar change in the right side of the equation.

9) In an acctual accouting system, the information about each business transaction is INITIALLY in an accounting reccord called the Journal and later this information is transfered "posted" to the appropriate accounts in the general ledger.

The jornal is a choronological (day by day) record of business transactions.

WHAT IS THE NET ICOME?

1) net income is an increase in owners' equity from the profitable operations of the business. Net income is a computation of the overall effects of many business transaction on the owners' equity. 

Net income is equal to the income that a firm has after subtracting costs and expenses from the total revenue. Net income can be distributed among holders of common stock as a dividends or held by the firm as retained earnings.

Net income or net loss=       Revenue    -     Expenses

A buisiness operating at profit may run short of cash.

Net income must be related to a specific period of time.

2) Retained earnings account appears in the owners' equity section of the balance sheet. earning net income cause the balance of the retained earning account to increase, if we assume that no dividends were given to stockholders. Dividends?????????????

Dividends are just part of the net income recorded by a company in a certain period and that the management decided to share with its investors. Each investor will receive an amount of money depending on the number of share that he owns.

when a company distribute dividends it decrease the balance of the Owners' Equity, because instead of taking all the net income and investing it, the company may decide to sacrify a part of it and give it as dividends.

DIVIDENDS ARE NOT EXPENSES 

The balance of RETAINED EARNING account represents the total net income of the corporation over the entire lifetime of the business, less all amount that have been distributed to the stock holders as dividends. retained earning are the amount of money dedicated by the company to finance its growth.

Accounting periods:  the period of time covered by an income statement is called the company's accounting period. usually, net income is measured for relatively short accounting period of equal lenght. this concept is called the Time period principle.

Revenue is the price of goods sold and services rendered during a given accounting period. 

Expenses are the costs of goods and services used up in the process of earning revenue. An expense always causes a decrease in owner's equity.    

Revenue should be offset by all the expenses incurred in producing revenue. = The Matching Principle

intresting  links:Basic Accounting Principles                       Accrual concept of accounting 

Debit and Credit Rules                                                                  Accounting Basics           

The Ledger Balance just have a page 110 "F.A 13e"

The Trial Balance         link: Trial Balance 

Remember that the the trial balance provides proof that the ledger is in balance. The agreement of the debit and credit totals of the trial balances gives assurance that:

1- equal debits and credits have been recorded for all transactions

2- the addition of the account  balances in the trial balance has been performed correctly.  

NOTHING   MORE