BUSAD 310 - CH 3 Accounting Cycle

Natural Business Year

A fiscal year that ends when business activities have reached the lowest point in an annual operating cycle.

Journal

A form for recording transactions in chronological order Transactions are entered in the journal in chronological order (January 1, 8, 15, etc.), and then this recorded information is used to update the ledger accounts. aka - General Journal aka - book of original entry because it contains the first formal information about business transactions

compound journal entry

A journal entry that is characterized by having two or more debits and/or multiple credits

Accounting Cycle

The series of accounting activities included in recording financial information for a fiscal period

Advertising expenses are recorded when

they are incurred, no matter when they are paid.

Posting

transferring information from a journal entry to a ledger account to find the balances of accounts

Trial balance does not show everything:

-The capital figure on the trial balance may not be the beginning capital figure. For instance, if Shakira Wilson had made additional investments during the period, the additional investment would have been journalized and posted to the Capital account. The only way to tell if the capital balance on the trial balance is the original balance is to check the ledger Capital account to see whether any additional investments were made. This confirmation of beginning capital will be important when we make financial reports. -Even careful cross-referencing does not guarantee that transactions have been properly recorded. For example, the following errors would remain undetected: (1) a transaction that may have been omitted in the journalizing process, (2) a transaction incorrectly analyzed and recorded in the journal, and (3) a journal entry journalized or posted twice

Formalities for making journal enteries:

-The debit portion of the transaction is always recorded first. -The credit portion of a transaction is indented ½ inch and placed below the debit portion. -The explanation of the journal entry follows immediately after the credit and is indented 1 inch from the date column. -One blank line follows each journal entry and explanation. This makes the journal easier to read, and there is less chance of mixing transactions. -Each transaction must affect at least two different accounts. -Finally, as always, the total amount of debits must equal the total amount of credits. The same format is used for each of the entries in the journal.

Tips for Recording Journal Entries

1. Read the facts and determine the two or more account titles involved. 2. For each account, determine the classification. That is, is the account a(n) Asset, Liability, Owner's equity, Revenue, or Expense? 3. For each account, determine if the account has increased or decreased. 4. Left = Debit; Right = Credit

posting steps

1. Write the date 2. Write the journal page number 3. Write the debit or credit amount 4. Write the new account balance 5. Return to the journal and write the account number in the Post Ref. (PR) column

Trial balance

4th step in the Accounting Cycle: Informal listing of the ledger accounts and their balances in the ledger to aid in proving the equality of debits and credits

Accounting Period

A period of time covered by an accounting report Although it can be any time period up to 1 year (e.g., 1 month or 3 months), most businesses use a 1-year accounting period.

four column account

A running balance account that records debits and credits and has a column for an ending balance (debit or credit). It replaces the standard two-column account we used earlier.

Journal Entry

A transaction that has been analyzed and recorded in a journal

Interim Reports

Financial statements that are prepared for a month, quarter, or some other portion of the fiscal year.

Prepaid expenses are

paid and recorded in an asset account before they are used or consumed

Ledger

the group of accounts maintained by a company aka: book of final entry