Ibrahim Sameer (MBA - Specialized in Finance, B.Com – Specialized in Accounting & Marketing)

Accounting Cycle The accounting cycle, also commonly referred to

as accounting process, is a series of procedures in the

collection, processing, and communication of

financial information.

Accounting involves recording, classifying,

summarizing, and interpreting phases.

Accounting Cycle Source Document

Transactions Analysis

Journalizing

Posting to ledgers

Preparation of unadjusted Trial Balance

Adjusting Entries

Preparation of Adjusting Trial Balance

Preparation of Financial Statements

Closing Entries

Source Documents Source documents are documents that provide proof

that a transaction had actually occurred, and this is the

basis of accounting records. Controls on source

document are important to ensure accounting

information is accurate and reliable.

Source Documents Examples of source document are sales invoice,

purchase invoice, debit note, credit notes, cheque and

receipts.

During an audit, source documents are used as

evidence that a particular business transaction

occurred.

Transactions Analysis Transactions are analysed; how each transaction

affects the accounting equation is looked into. At this

stage the accounts affected by the transaction and how

it is affected (increased or decreased) will be

identified.

Transactions Analysis For example, a loan made by the owner in his name

that does not have anything to do with the entity is not

accounted for.

The transactions identified are then analyzed to

determine the accounts affected and the amounts to

be recorded.

Journalizing A journal is a book – paper or electronic – in which

transactions are recorded. Business transactions are

recorded using the double-entry bookkeeping system.

They are recorded in journal entries containing at

least two accounts (one debited and one credited).

Journalizing To simplify the recording process, special journals are

often used for transactions that recur frequently such

as sales, purchases, cash receipts, and cash

disbursements. A general journal is used to record

those that cannot be entered in the special books.

Journalizing Transactions are recorded in chronological order and

as they occur. Hence, journals are also known as Books

of Original Entry.

Posting Records from the journal are then posted (transferred)

to ledgers. Posting should be done on timely basis, to

ensure ledger is up to date.

Posting For example, all journal entries made to Cash would be

transferred into the Cash account in the ledger.

Increases and decreases in cash will be entered into

one ledger account. Thus, the ending balance of Cash

can be determined.

Preparation of Unadjusted Trial Balance

A trial balance is prepared to test the equality of the

debits and credits. All account balances are extracted

from the ledger and arranged in one report.

Afterwards, all debit balances are added. All credit

balances are also added. Total debits should be equal

to total credits.

Preparation of Unadjusted Trial Balance

Some errors could exist even if debits are equal to

credits, such as double posting or failure to record a

transaction.

Adjusting Entries Adjusting entries are prepared as an application of

the accrual basis of accounting. At the end of the

accounting period, some expenses may have been

incurred but not yet recorded in the journals. Some

income may have been earned but not entered in the

books.

Adjusting Entries Adjusting entries are prepared to have the accounts

updated before they are summarized into the financial

statements.

Adjusting entries are made for accrual of income,

accrual of expenses, deferrals(income method or

liability method), prepayments (asset method or

expense method), depreciation, and allowances.

Preparation of Adjusted Trail Balance

An adjusted trial balance may be prepared after

adjusting entries are made and before the financial

statements are prepared. This is to test if the debits are

equal to credits after adjusting entries are made.

Preparation of Financial Statement

When the accounts are already up-to-date and equality

between the debits and credits have been tested, the

financial statements can now be prepared. The

financial statements are the end-products of an

accounting system.

Preparation of Financial Statement

A complete set of financial statements is made up of:

(1) Income Statement

(2) Statement of Changes in Equity

(3) Statement of Financial Position or Balance Sheet

(4) Statement of Cash Flows

(5) Notes to Financial Statements.

Closing Entries At the end of an accounting period, all temporary

accounts are closed. Revenues and expenses are closed

to income summary. Profit or loss is then transferred

to capital account. Drawings are also closed to capital

account too.

Accounting Equation You need to understand that all economic events

(transaction) can be classified into three categories:

Owner’s equity

Liabilities

Assets

Assets Assets are resources that are owned by the entity.

Land, properties, equipment, motor vehicle, cash,

receivables (debtors) are examples of assets. These

assets are expected to provide future economic

benefits to the entity.

Liabilities Liabilities are debts or obligation of the entity.

Loans, bank overdrafts and payables (creditors) are

examples of liabilities. The liabilities are expected to

be cleared off by sacrificing the entity’s assets.

Owner’s Equity Owner’s equity is the residual claim (rights) of entity

assets.

Owner’s Equity There are four items that can affect the owner’s equity,

and they are:

Capital investments: they will increase owners’ equity.

Drawings: they will decrease owners’ equity

Revenues: they will increase the owners’ equity.

Expenses: they will decrease the owners’ equity.

Owner’s Equity Hence the equations can be rewritten as:

Transaction Analysis The following are the steps that you can use to help

you analyse business transactions.

STEP 1: Read and think about the transaction

STEP 2: Identify components in the equations that are

affected. Is it Asset, Liability or Owner’s Equity?

Transaction Analysis STEP 3: Identify the accounts and the effects.

Decreased? Increased?

STEP 4: Check the equation; it has to be balanced.

Transaction Analysis - Example Sonic invested RM50,000 cash to start a photography

business. (1 Sep 2013)

Sonic purchased a photo processing machine costing

RM1,000 cash. (3 Sep 2013)

Sonic withdrew RM10,000 cash for personal use. (4

Sep 2013)

Transaction Analysis - Example

Transaction Analysis - Example

Transaction Analysis - Example

Q & A