ACCOUNTING CYCLE

BY
ABDULLATIF ESSAJEE
 Accounting Cycle

 the sequence of accounting procedures used

to record, classify and summarise accounting
information.

 begins with the initial recording of business

transactions and events and ends with the
preparation of formal financial statements
and reports.
 Accounting Cycle

The activities in their sequential order are:

 Recording transactions and events in the
book of original entry (journalizing),

 Classifying the entries in the journals

(posting) to the ledger,

 Preparation of the un-adjusted trial balance,

 Accounting Cycle
 Recording end of period adjusting entries in the
journal (journalizing),

 Classifying end of period adjusting entries in the

journal to the ledger, (posting)

 Extraction of the Adjusted Trial Balance,

 Preparation of the financial statements, reports

and other disclosures,
 Accounting Cycle
 Recording of closing entries in the journal
(Journalizing),

 Classifying of closing entries in the journal to the

ledger (Posting), and

 Preparation of the Post-closing Trial Balance.

 Accounting Cycle
Record transactions and events
1 8 Post-closing
2
Post
Record end of period adjustment Journal Ledger Extract Trial balance
4

Record closing entries

7
5
3 Extract Extract

Adjusted Trial
Unadjusted Trial balance
balance
6

Financial
statements
and Reports
 Source document

a form of written evidence of a business

transaction.

 Examples of source documents include

invoices, statement of accounts, cash
receipts, cash sale, credit notes, debit notes,
local purchase orders, bank statements,
cheque counterfoils, goods received note,
goods returned note, and deposit slips.
 The Journal

 is a chronological, day to day, record of all

transactions and events.

 theaccounting record in which transactions

and events are first recorded.

 sometimes referred to as the book of original

entry.
 The Journal

 The information about each transaction and event that

should be recorded in the journal is:

– The date of the transaction or event

– The name of the account(s) to be debited and the amount(s)
– The name of the account(s) to be credited and the amount(s)
– Reference; a column to enter account number as per chart of
accounts
– A brief description of the transaction or event. This is called a
narrative.
 The General Journal
Layout

Date Particulars Ref Debit Credit

The name of account(s) to be debited xx

The name of account(s) to be credited xx

The narrative

The name of account to be debited xx

The name of account to be debited Xx xx
The name of account(s) to be credited

The narrative
 Journalizing
Travel Agency Illustration

Date Particulars/Description Ref Debit Credit

Sh. Sh.
2024 Cash account
Sep 1 June Capital 2,000,000
2,000,000
To record amount invested in the
business
Office equipment
1 Cash account
Accounts payable 1700,000
To record the purchase of office 800,000
equipment partly on cash and partly
900,000
on credit
 Journalizing
Travel Agency Illustration

Date Particulars/Description Ref Debit Credit

Ksh. Ksh.

Office equipment 1,700,000

Cash at bank 800,000
Accounts payable 900,000
To record the purchase of office
equipment partly on cash and partly
on credit
 Journalizing
Travel Agency Illustration

Date Particulars/Description Ref Debit Credit

Ksh. Ksh.

2 Office supplies 120,000

Accounts payable 120,000

Being the purchase of office supplies

from Fiesta Office Supply limited on
credit
 Journalising

7 Cash at bank 128,000

Fees earned 128,000

To record receipt of cash for

services rendered
 Journalising

8 Accounts payable 70,000

Cash at bank 70,000

To record part payment on amount

owing on office supplies
 Journalising

15 Salaries and Wages 95,000

Cash at bank 95,000

Being payment to employees for

work performed to date
 Journalising

16 Fees receivable 72,000

Fees earned 72,000

To record billing to customer for

services rendered
 Journalising

17 Utilities 18,000
Accruals 18,000

To record utility bill received to be

paid in October
 Journalising

19 June Drawings 22,000

Cash at bank 22,000

To record amount withdrawn for

personal use

22 Cash at bank 25,000

Fees receivable 25,000

Being amount received from credit

clients
 Journalising

25 Cash at bank 55,000

Fees received in advance 55,000

To record cash received for services

to be provided in October

30 Office supplies expense 40,000

Office supplies 40,000

Being office supplies used in the

month of September
 Journalising

31 Cash at bank 500,000

Notes payable 500,000

To record amount borrowed from

Valley City Bank
 The Journal

Advantages to be gained from using a journal.

 The journal shows all the information about a transaction and

event in one place and also provides an explanation of the
transaction and event. The journal is the only accounting record
that shows the complete story of a transaction or event in one
entry.

 The journal provides a chronological record of all transactions

and events in the life of a business. If one wants to look up the
facts about a transaction or event of some months or years back,
all one needs is the date of the transaction in order to locate it in
the journal.
 The Journal

 The use of a journal helps to minimise errors. If transactions

were recorded directly in the ledger, it would be relatively easy
to make such errors as omitting the debit or the credit, or
entering the debit twice or the credit twice or debiting an
amount and crediting a different amount. Such errors are not
likely to be made in the journal, since the offsetting debits and
credits appear together for each transaction.
 Posting to the Ledger

 is the technical activity of transferring amounts

entered in the journal to their respective ledger
accounts

 merely transfers existing information from one

accounting record to another.

 The objective of posting is to classify the effect of all

transactions and events on each individual asset,
liability, owner's equity, revenue and expense
account.
 The Ledger
 An accounting system includes a separate
record for each element that appears in its
financial statements.

 All these separate records or accounts and the

entire group of accounts is referred to as a
ledger.

 It is the ledger account that constitutes the

central core in the data processing aspect of any
activity.
 An Account

 Accounts can take either of the two formats:

(a) T format
DR Account title (Name) CR
Date Particulars Ref Amount Date Particulars Ref Amount

Left side or Debit side Right side or Credit side

 An Account (cont’d)

(b) Statement format/Running balance

DATE PARTICULARS REF DEBIT CREDIT BALANCE

 Sequencing and numbering of ledger
accounts

 Accounts are usually arranged in the ledger in the order in

which they appear on the financial statements, that is assets
first, liabilities second, owners’ equity third, followed by
revenues and expenses last.

 The number of accounts needed by an accounting entity will

depend on its size, the nature of operations, and the extent to
which management and regulatory agencies want detailed
classification of information.

 An identification number is usually assigned to each account

and a listing of the account titles and account numbers is called
a “Chart of accounts.”
 Chart of Accounts

A small enterprise might use the following

numbering system for its accounts:

101 – 199 ASSET ACCOUNTS

201 – 299 LIABILITY ACCOUNTS
301 – 399 EQUITY ACCOUNTS
401 - 499 REVENUE ACCOUNTS
501 – 599 EXPENSE ACCOUNTS
 TRIAL BALANCE
 a two column schedule listing of the account numbers,
names and balances in the order in which they appear in
the ledger.

 for every transaction there must be equal monetary amounts of

debits and credits recorded in the journal(s) and posted to the
ledger(s).

 The equality of debits and credits posted to the ledger accounts

is verified by the preparation of a trial balance.

 The trial balance provides proof that the ledger is in balance.

 TRIAL BALANCE

 The agreement of the debit and credit totals of

the trial balance gives assurance that

– Equal debits and credits have been recorded for

each transaction
– The debit or credit balance of each account has
been correctly computed
– The addition of the account balances in the trial
balance has been correctly performed.
 TRIAL BALANCE

 The trial balance also

– supplies a listing of all open accounts and their
balances
– serves as a basis of end of period adjustments.
– also used in the preparation of financial
statements and reports.
ERRORS THAT MAY CAUSE A TRIAL
BALANCE NOT TO BALANCE

 Misreading of figures through bad writing or alignment.

 Errors in addition of the trial balance.
 The posting of a debit as a credit and vice versa.
 Omission of an account balance from the trial balance.
 Errors in the calculation of the balance in the account.
 Omission of either a credit or debit entry in the accounts.
 Entry of one figure on one side of the account and a different
figure on the other side of an account.
 Recording of a debit balance under the credit column of the trial
balance and vice versa
 ERRORS THAT ALLOW A TRIAL
BALANCE TO BALANCE

 Complete omission of an entry. A transaction may

not have been journalized at all.
 Complete omission of a posting. A correct journal
entry may not have been posted at all.
 The use of an incorrect account in journalizing or
posting. An entry may have been made in the wrong
account but of the correct amount and in the correct
side of the account.
ERRORS THAT MAY ALLOW A TRIAL
BALANCE TO BALANCE

 The posting of a journal entry twice.

 Off-setting or compensating errors may have
been made in recording the amount of
transactions. The effect of one mistake may
be cancelled by another of the same size
acting in the reverse direction.
 Travel Agency
Unadjusted Trial Balance
As at 30th September 2024
Account Account Title Debit Credit
Number
KSh KSh

Cash at bank 1,721,000

Fees receivable 47,000
Office supplies 80,000
Office equipment 1,700,000
Accounts payable 950,000
Accruals 18,000
Notes payable 500,000
Fees received in advance 55,000
June capital 2,000,000
June drawings 22,000
Fees earned 200,000

Salaries and wages 95,000

Office supplies expense 40,000

Utility expense 18,000 _________

3,723,000 3,723,000
 TRIAL BALANCE (CONT’D)
 Most of the errors, if not all, identified with respect to the trial
balance relate to a manual system of accounting.

 Despite the limitations identified, the trial balance is a useful

device.

 It not only provides assurance that the ledger is in balance, but

it also serves as a convenient stepping stone for the
preparation of financial statements and reports.

 The trial balance is a working paper useful to the accountant

but not intended for publication.