Notesale: Turn your study into money

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UNIVERSITY OF THE WEST INDIES
Mona Campus

The Financial Accounting Cycle
1
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It begins the process of entering transactions in the accounting system
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g
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Source documents serve as objective evidence of business transactions
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Source documents are usually filed
for possible future reference
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Journalizing Business Transactions
 Process of entering the transactions in a journal
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g
...

 The General Journal is used to record all transactions for which a special journal
is not maintained
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3
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 Where there are special journals there may be corresponding special ledgers
as well as a General Ledger (GL)
...
This summary
account is referred to as a control account e
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Sales Ledger Control Account
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Trial Balance
 A trial balance is a list of all accounts and their balances extracted from the
ledgers
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A TB is not a formal statement and is only used internally by the accountant
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Closing Process
Closing entries reduce all nominal or temporary accounts to zero balances
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iii)

Close Income summary to the Owner’s equity A/C
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Close all revenue accounts to the Income Summary

Close drawings to the Owner’s Equity/Capital A/C

Post-Closing TB
 Provides a listing of all real/permanent accounts after closing entries
 Assures that total debits equal total credits before the start of the new
accounting period
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ADJUSTMENTS
The trial balance does not include certain revenue and expense transactions which may have
been omitted during the accounting period
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Adjusting entries are done to allocate revenues and
expenses among accounting periods in accordance with the realization and matching principles
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Prepaid Expenses
Advance payments of expenses or cash paid for services not yet used up e
...
rent,
insurance and electricity
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2
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When cash is received:
Debit Cash and Credit Unearned Revenue
2

In the period that income is earned Debit Unearned Revenue; Credit Revenue Earned
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3
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To record
Debit Expense A/C; Credit Expense Payable e
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Rent Payable
Accrued expenses are shown in the balance sheet along with current liabilities
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Accrued revenue
Revenue earned during the accounting period but not yet received or collected
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5
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Depreciation may come about as a result of general
wear and tear, changes in technology and/or obsolescence
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Purpose of Depreciation
The cost of a fixed asset should be written off over its economic useful life
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e
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The part of the cost of the
fixed asset consumed in earning the income for a period is an expense and must be taken out of
profits
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e
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Note: The physical life of an asset is different from its economic life
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This may be
influenced by technological advancement
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The most commonly used method is the straight-line
method
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3

Annual Depreciation =

Depreciable value
E
...


Depreciable Value
Economic Useful Life

= Capitalized cost of FA – Residual value

Black Ltd
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The estimated useful
life of the car is five (5) years and it is expected to have a residual value of $58,000
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Accumulated
depreciation will be reflected in the balance sheet as a deduction from the cost of the fixed asset
...

The difference between the cost of the asset and the accumulated depreciation is referred to as
the net book value (NBV) or carrying value of the asset
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Worksheets are not financial statements and are not
a formal part of the accounting system
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The worksheet is usually prepared
in pencil or as a spreadsheet on the computer
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Prepare the unadjusted trial balance

2
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Prepare the adjusted trial balance

4
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All
revenues and expenses go to the income statement; assets, liabilities, drawing and
capital go to the balance sheet
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Complete the worksheet
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If total debits  total credits, this results in a net loss
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Transfer this balancing figure to the balance sheet, which should balance

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