LU5

Question 1

What is the accounting cycle?

Answer 1

It is the sequence of accounting procedures during an accounting period; it is a continuous process of recording and reporting financial information.

Question 2

What are the 9 steps in the accounting cycle:

Answer 2

Business transactions

1. Analyze transactions and journalize
2. Post transactions
3. Trial balance
4. Prepare adjustments
5. Journalize adjustments
6. Post adjusting entries
7. Financial statements
8. if EOY: closing entries
9. Post-closing trial balance

Question 3

Give the summarized version of the functions of the accounting cycle:

Answer 3

• Analyze and journalize transactions
• 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 the end of the year, close income statement accounts; print closing- trial balance

Question 4

What is cash basis accounting?

Answer 4

Revenue is recorded only when cash is received, and an expense is recorded only when cash is paid; only for small businesses. Does not comply with GAAP

Question 5

What is accrual basis accounting?

Answer 5

All revenue and expense transactions are recorded in the period in which they occur (realization and matching principle); requires adjustments prior to preparation of financial statements for particulars such as invoices not yet received, expired assets, potential bad debts etc. Complies with GAAP

Question 6

Analyzing and journalizing transactions

Answer 6

• Identify the accounts that are affected by the transaction (name, increase/decrease, dr/cr)
• The transactions are recorded in designated “journals”

Question 7

Posting to general ledger

Answer 7

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

Question 8

Creating a working trial balance

Answer 8

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

Question 9

Adjusting entries

Answer 9

• 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
• Depreciation on china, glassware, and silver
• Unpaid payroll days at the end of the month
• Unpaid payroll taxes at the end of the month

Question 10

Issuing financial statements

Answer 10

Once all adjusting entries are made, an adjusted trial balance, and the financial statements can be issued (Income statement, Balance Sheet, Cash Flow statement)

Question 11

End of year closing entries

Answer 11

• All income statement accounts are set to zero (revenue and expenses), resulting in a net income/loss.
• Add up all revenue accounts and subtract expenses -> net income/loss.

Question 12

Post-closing trial balance

Answer 12

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