LU5: The Accounting Cycle

Question 1

The accounting cycle

Answer 1

The sequence of accounting procedures performed during an accounting period; it is a continuous process of recording and reporting financial information. An accounting system is a database of financial information about a company.

• analyze and journalize transaction
• post transactions to the general ledger
• print a trial balance
• analyze the trial balance; prepare, journalize and post adjusting entries
• issue the financial statements
• at end of year, close income statement accounts; print post-closing trial balance.

Question 2

Cash basic Accounting

Answer 2

Revenue is recorded only when cash is received and an expense is recorded only when cash is paid only for small businesses -> can produce misleading information and does not comply with GAAP

Question 3

Accrual Basis Accounting

Answer 3

• All revenue and expense transactions are recorded in the period in which they occur. ; requires adjustments prior to preperation of financial statements for particulars such as invoices not yet received, expired assets, potential bad debts.
• used by most businesses, complies with GAAP

Question 4

Analyzing and journalyzing transactions

Answer 4

• Indentify the accounts that are affected by the transaction.
• the transactions are recorded in designated “journals”

Question 5

Posting to the general ledger

Answer 5

The accounts in the general ledger are updated with the totals of each account; both totals and sundry items included

Question 6

Creating a Working Trial Balance

Answer 6

A trial balance is compiled to see if debits and credits match before any adjustments.

Question 7

Adjusting entries

Answer 7

Cost of food used in the revenue process
Cost of employee meals
Supplies consumed during the month
Prepaid insurance expired by the passage of one month
Depreciation increase by the passage of one month
Deprecation on china, glassware and silver
Unpaid payroll days at the end of the month
Unpaid payroll taxes at the end of the month
-> adjusting entries are required

Question 8

Correcting entries

Answer 8

Not the same as adjusting entries, refers to when an error is fixed in the general ledger.

Question 9

Issuing Financial Statements

Answer 9

Once all adjusting entries are made, an adjusted trial balance, and the financial statements can be issued

Question 10

End of year closing entries

Answer 10

All income statements accounts are set to zero (revenue and expenses) resulting in a net income/los
Add up all revenue accounts and substract expenses -> net income/loss

Question 11

Proprietorship net income

Answer 11

The equity accounts are called capital and withdrawals. The net income from operations of the business increases owner’s capital, whereas a net loss decreases owner’s capital.

Question 12

Corporation net income

Answer 12

the net income of a corporation belongs to the corporation and cannot be withdrawn unless the board of directors declares a dividend. Therefore, the net income from operations is an increase to retained earnings, as the declaration of dividends can be treated as direct reduction of retained earnings.

Question 13

Post-closing trial balance

Answer 13

• After the closing entries have been posted, the post-closing trial balance is compiled
• Shows balance of only the balance sheet accounts