5.Completing Accounting Cycle 2

8/8/2019 5.Completing Accounting Cycle 2

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G H AN EN DR A F A GO

Accounting Cycle


2/31

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


3/31

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


5/31

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


10/31

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


14/31

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


15/31

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.


16/31

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


17/31

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


18/31

Dr. Capital Account Cr.

Date Description G.F Amou

nt


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


19/31

Dr.Dr. Cash AccountCash Account Cr.Cr.

Date Description G.F Amou

nt


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


20/31

Dr.Dr. Purchase/Goods AccountPurchase/Goods Account Cr.Cr.


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.


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.


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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24/31

Dr.Dr. Salary AccountSalary Account Cr.Cr.


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


25/31

Dr.Dr. Salary Payable AccountSalary Payable Account Cr.Cr.


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


26/31

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


27/31

Preparing Financial Statements

After adjusting entries, accountant preparesfinancial statement normally using work sheet.

They are : Income statement Balance sheet Retained Earnings

Cash Flow Statement


28/31

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


30/31

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.

5.Completing Accounting Cycle 2

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