5.Completing Accounting Cycle 2
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Transcript of 5.Completing Accounting Cycle 2
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G H AN EN DR A F A GO
Accounting Cycle
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Analysis of Transaction
yAnalyzing the transactions -Accountingequation
y Journalizing transactions
y Posting transaction into ledgery Preparing Trial Balance
yAdjusting Accounts
y Preparing Financial Statements
y Preparing and posting closing entries
y Preparing and Post closing trial balance
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Types of Account
y Account is a record that maintains the history ofincreases and decreases of accounting elements.There are three types of account:
y Personal Accounts: Account of a person or firm orcompany
y Real Accounts:Account of properties of business
y Nominal Accounts: Accounts of expenses, incomes,losses and gains
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Rule of Double Entry
Types of Accounts Debit (Dr.) Credit (Cr.)
PERSONAL ACCOUNT
REAL ACCOUNT
NOMINAL ACCOUNT
RECEIVER
WHAT COMES IN
EXPENSES/LOSSES
GIVER
WHAT GOES OUT
INCOMES AND
GAINS
y Debit - Increases in Assets/Expensesy Credit - Decrease in Asset/ Expensesy Debit - Decreases in Liabilities/Incomes/Owners
equityy Credit Increases in Liabilities/Incomes/Owners
equity
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Analysis of Transactions
Date Transactions Accountsinvolved Nature ofaccountsEffects Rule of
Dr. or Cr.
Jan 12010
Started businesswith cash $.2000
Cash
Capital
Assets
OE
Increase
increase
Cash a/c Dr $2000
Capital $2000
Jan 22010
Purchasedfurniture of $.500
Furniture
Cash
Assets
Assets
Increase
Decrease
Furniture Dr.$500
Cash $500
Jan 52010
Paid Rent $.500 Rent
Cash
Expenses
Assets
Increase
Decrease
Rent a/c Dr. $500
cash a /c $ 500
Jan 122010
Purchased good of$300
Purchasea/c
Cash
Expenses
Assets
Increase
Decrease
Purchase a/c $300
Cash $300
Jan 122010
Goods sold for$700
Cash
Sales
Assets
Income
Increase
increase
Cash Dr. $700
Sales $700
Jan 152010
Drew cash $100forpersonal use
Drawing
Cash
Equity
Assets
DecreaseDecrease
Drawing a/cDr.$100
Cash a /c $100
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Journal: when transaction occurs, the first step in record ininto original entry, subsidiary books or journal. It is simple booksof account in which all business transactions are originally
recorded
Date Descriptions L.F Dr. Cr.
Feb 2,2010
Cash A/C Dr.
To Capital A/C
(Being goods purchased on cash )
2000
2000
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Ledger: Ledger is the main books of account in which various types ofaccounts personal, nominal, and real accounts are opened and
maintained.
Dr. Capital Account Cr.
Date
Description G.F Amount
Date Descriptions
G.F Amount
Jan15
To bal c/d 2000 Jan 1 By Cash 2000
2000 2000
Jan16 By bal b/d 2000
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Dr. Cash Account Cr.
Date Description G.F
Amount Date Descriptions G.F
Amount
Jan 1
Jan10
To Capital
To sales
2000
700
Jan 2
Jan 5
Jan 10
Jan 15Jan 15
By Furniture
By Rent
By Purchase
By DrawingsBy Balance c/d
500
500
300
1001300
2700 2700
Feb16
To balanceb/d
1300
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Dr. Sales Account Cr.
Date Description G.F Amount Date Descriptions G.
F
Amou
nt
Jan 15 Tobalancec/d
700 Jan 10 By sales 700
700 700
Jan 16 By balanceb/d
700
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Dr.Dr. Furniture AccountFurniture Account Cr.Cr.
Date Description G.F Amoun
t
Date Descriptions G.F Amount
Jan 2Jan 2 To CashTo Cash 500500 Jan 15Jan 15 By Balance c/dBy Balance c/d 500500
500500 500500
Jan 16Jan 16 To bala b/dTo bala b/d 500500
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Dr.Dr. Rent AccountRent Account Cr.Cr.
Date Description G.F Amount Date Descriptions G.F Amount
Jan 2Jan 2 To CashTo Cash 500500 Jan 15Jan 15 By Balance c/dBy Balance c/d 500500
500500 500500
JanJan1616
To Bal B/dTo Bal B/d 500500
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Dr. Purchase Account Cr.
Date
Description G.F Amount Date Descriptions G.F Amount
Jan 2 To Cash 300 Jan 15 By Balance c/d 300
300 300
Jan16
To bal b/d 300
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Dr.Dr. Drawing AccountDrawing Account Cr.Cr.
Date
Description
G.F Amount
Date Descriptions
G.F Amount
JanJan1515
To cashTo cash 100100 JanJan1515
By BalanceBy Balancec/dc/d
100100
100100 100100
JanJan1616
To bal b/dTo bal b/d 100100
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Trial Balance: It is the list of all balances standing inthe ledger accounts and cash books of a business in nayparticular date.
Trial Balance
As on Dec 31,2009Account HeadsAccount Heads Debit (Rs.)Debit (Rs.) Credit (Rs.)Credit (Rs.)
Capital
Furniture
Rent
Purchase
Sales
Drawings
Cash
--
500500
500500
300300
100100
1,3001,300
2,0002,000
--
--
--
700700
--
--
Total 2,7002,700 2,7002,700
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Adjusting entries
At the end of fiscal year, accountants reviews the expenses
properly matched of the period with the revenue of the period
that they help and sure that assets, liabilities and equity areproperly stated.
In adjusting entries requires the following steps:
Step 1: identify any account requiring adjustment
Step 2: determine the correct accounting balance in each account
requiring adjsutment.
Step 3: prepare necessary accounting entries to bring account into
agreement.
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Transaction of Degoo Furniture Houses
Jan 1Jan 1
Jan 5Jan 5
Jan 15Jan 15
Jan 20Jan 20
Jan 31Jan 31
Commenced Business with a balance at bankCommenced Business with a balance at bank
Rs.80,000Rs.80,000
Furniture purchased from Chandra Rs.100,000Furniture purchased from Chandra Rs.100,000
Furniture of costing Rs.15000 was sold to HarishFurniture of costing Rs.15000 was sold to Harish
Rs.20,000Rs.20,000
Furniture purchased and paid byFurniture purchased and paid by ChequesCheques
Rs.20,000Rs.20,000
Salary due for the month Rs.20,000Salary due for the month Rs.20,000
Required:Required: Journal entriesJournal entries
Posting into ledgersPosting into ledgers
Trail Balance of the monthTrail Balance of the month
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In the books of Transaction of Degoo Furniture HousesDate Description LF Debit Credit
Jan1
Cash a /c Dr
Capital
(For starting business in cash)
Rs.80,0000
Rs.80,000
Jan
5
Purchase a /c Dr.
Chandraa/c
For purchase of goods on credit)
100,000
100,000
Jan15
Harish a /c Dr
Sales a/c
(For goods sold on credit)
20,000
20,000
Jan
20
Purchase a /c Dr
Cash a/c(forpurchase of goods)
20,000
20,000
Jan31
Salary a/c Dr.
Salary payable a/c
(for salary payable)
20,000
20,000
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Dr. Capital Account Cr.
Date Description G.F Amou
nt
Date Descriptions G.F Amount
Jan
31
To Balance c/d 80,000 Jan 1 By cash a/c 80,000
80,000 80,000
Feb 1 By Bal. b/d 80,000
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Dr.Dr. Cash AccountCash Account Cr.Cr.
Date Description G.F Amou
nt
Date Descriptions G.F Amount
JanJan
11
To Capital a/cTo Capital a/c 80,00080,000 Jan 20Jan 20
Jan 31Jan 31
By PurchaseBy Purchase
By balance c/dBy balance c/d
20,00020,000
60,00060,000
80,00080,000
FebFeb
11
To Bal. b/dTo Bal. b/d 60,00060,000
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Dr.Dr. Purchase/Goods AccountPurchase/Goods Account Cr.Cr.
Date Description G.F Amount Date Descriptions G.F Amount
JanJan
11
JanJan
2020
To ChandraTo Chandra
a/ca/c
To Cash a/cTo Cash a/c
100,000100,000
20,00020,000
Jan 31Jan 31 By balanceBy balance
c/dc/d
120,000120,000
120,000120,000 120,000120,000
FebFeb
11
To Bal. b/dTo Bal. b/d 120,000120,000
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Dr.Dr. Chandra AccountChandra Account Cr.Cr.
Date Description G.F Amount Date Descriptions G.F Amount
JanJan
3131
To balance c/dTo balance c/d 100,000100,000 Jan 5Jan 5 By PurchaseBy Purchase
a/ca/c
100,000100,000
100,000100,000 100,000100,000FebFeb
11
To Bal. b/dTo Bal. b/d 100,000100,000
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Dr.Dr. Harish AccountHarish Account Cr.Cr.
Date Description G.F Amount Date Descriptions G.F Amount
JanJan
1515
To sales a/cTo sales a/c 20,00020,000 Jan 31Jan 31 By Bal. c/dBy Bal. c/d 20,00020,000
20,00020,000 20,00020,000FebFeb
11
By Bal. b/dBy Bal. b/d 20,00020,000
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Dr.Dr. Salary AccountSalary Account Cr.Cr.
Date Description G.F Amount Date Descriptions G.F Amount
JanJan
3131
To salaryTo salary
payablepayable
20,00020,000 Jan 31Jan 31 By balanceBy balance
c/dc/d
20,00020,000
20,00020,000 20,00020,000FebFeb
11
To Bal. b/dTo Bal. b/d 20,00020,000
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Dr.Dr. Salary Payable AccountSalary Payable Account Cr.Cr.
Date Description G.F Amount Date Descriptions G.F Amount
JanJan
3131
To balance c/dTo balance c/d 20,00020,000 Jan 31Jan 31 By Salary a/cBy Salary a/c 20,00020,000
20,00020,000 20,00020,000FebFeb
11
To Bal. b/dTo Bal. b/d 20,00020,000 Feb 1Feb 1 By Bal. b/dBy Bal. b/d 20,00020,000
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Trial Balance: It is the list of all balances standing inthe ledger accounts and cash books of a business in nay
particular date.
Trial Balance
As onJan 31,2009
Account HeadsAccount Heads Debit (Rs.)Debit (Rs.) Credit (Rs.)Credit (Rs.)
Capital
Sales
Salary
Purchase
HarishChandra
Salary payable
Cash
--
--
20,00020,000
120,000120,000
20,00020,000--
60,00060,000
80,00080,000
20,00020,000
--
--
--100,000100,000
20,00020,000
--
Total 220,000220,000 2,20,0002,20,000
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Preparing Financial Statements
After adjusting entries, accountant preparesfinancial statement normally using work sheet.
They are : Income statement Balance sheet Retained Earnings
Cash Flow Statement
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Income Statementfor the year For the month of Jan 2009
ParticularsParticulars DetailsDetails AmountsAmounts
Sales RevenuesSales Revenues
Less: returnsLess: returns
20,00020,000
oo 20,00020,000
15,00015,000
Less: Cost of Goods Sold:Less: Cost of Goods Sold:
Opening stockOpening stock
Add: PurchaseAdd: Purchase
Less: ReturnsLess: Returns
120,000120,000
00
Less: Closing stockLess: Closing stock
120,000120,000
105,000105,000
Gross ProfitGross Profit
Add: Other incomes (i.e. Interest/dividend)Add: Other incomes (i.e. Interest/dividend)
5,0005,000
00
Less: Operating expenses:Less: Operating expenses:
Salary expensesSalary expenses
Administrative expensesAdministrative expenses
20,00020,000
00
5,0005,000
20,00020,000
Operating profit before taxOperating profit before tax
Less: Income taxLess: Income tax
(5000)(5000)
00
Profit after TaxProfit after Tax (5000)(5000)
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Balance SheetBalance Sheet
As of 31 Jan 2009As of 31 Jan 2009
Capital &LiabilitiesCapital &Liabilities AmountAmount AssetsAssets AmountAmount
Owners Equity:Owners Equity:
Common stockCommon stock
Retained EarningsRetained Earnings
8000080000
(15000(15000
Current Assets:Current Assets:
CashCash
Account receivablesAccount receivables
StockStock
AdvancesAdvancesAccrued IncomesAccrued Incomes
60,00060,000
20,00020,000
105,000105,000
00
00
Owners EquityOwners Equity 65,00065,000 Total Current AssetsTotal Current Assets 185,000185,000
Long term debtsLong term debts
Current Liabilities andCurrent Liabilities and
ProvisionsProvisions Salary payableSalary payable
Account payableAccount payable
--
--
20,00020,000
100,000100,000
Fixed assets:Fixed assets:
Plant and EquipmentsPlant and Equipments
Furniture and fixturesFurniture and fixtures
InvestmentsInvestments
Fictitious AssetsFictitious Assets
--
--
--
--
--
TotalTotal 185,000185,000 TotalTotal 185,000185,000
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Preparing and post closing entries
At the end of fiscal year after accounting staffs adjustments arefinished and auditors have finished the audit, we have to closethe accounts.
The closing process resets the nominal (temporary) account zeroand moves the net income and loss to the equity accounts.Nominal accounts are incomes, revenues, gains, losses, that areparts of net income plus owners withdrawal and dividendaccounts.
Permanent accounts (real account) include assets, liabilities andequity accounts except owners withdrawal and dividendaccounts.
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Preparing Post Closing Trial Balances
After closing entries and post them into ledger,only the balance sheet accounts should have
balance remaining. Any owners withdrawal accounts and dividend
accounts should have zero. We prepare it to ensure that closing entries
zeroed the nominal accounts.