Accounting

The Basics STATEMENT OF CASH FLOWS A summary of the cash receipts and cash payments of a business entity for a specific period of time, such as a month or a year. 1. Accounting Equation: Assets = Liabilities + Owner’s Equity 2. T Account: 6. Accounting Cycle: Account Title Left Side debit 1. 2. 3. 4. 5. 6. 7. Right Side credit 3. Rules of Debit and Credit: ASSETS Asset Accounts Debit for Credit for increases ( ) decreases ( ) Ba l a n c e Owner’s Drawing Account Debit for increases ( ) Balance Credit for decreases ( ) LIABILITIES Liability Accounts Debit for decreases ( ) Credit for increases ( ) Ba l a n c e Transactions are analyzed and recorded in the journal. Transactions are posted to the ledger. An unadjusted trial balance is prepared. Adjustment data are assembled and analyzed. An optional end-of-period spreadsheet (work sheet) is prepared. Adjusting entries are journalized and posted to the ledger. An adjusted trial balance is prepared. OWNER’S EQUITY Owner’s Capital Account Debit for Credit for decreases ( ) increases ( ) Balance Income Statement Accounts Revenue Accounts Expense Accounts Debit for decreases ( ) Credit for increases ( ) Balance Debit for increases ( ) Balance Credit for decreases ( ) The side of the account for recording increases and the normal balance is shown shaded. 4. Analyzing and Journalizing Transactions 1. Carefully read the description of the transaction to determine whether an asset, a liability, an owner’s equity, a revenue, an expense, or a drawing account is affected. 2. For each account affected by the transaction, determine whether the account increases or decreases. 3. Determine whether each increase or decrease should be recorded as a debit or a credit, following the rules of debit and credit. 4. Record the transaction using a journal entry. 5. Periodically post journal entries to the accounts in the ledger. 6. Prepare an unadjusted trial balance at the end of the period. 5. Financial Statements: INCOME STATEMENT A summary of the revenue and expenses of a business entity for a specific period of time, such as a month or a year. STATEMENT OF OWNER’S EQUITY A summary of the changes in the owner’s equity of a business entity that have occurred during a specific period of time, such as a month or a year. BALANCE SHEET A list of the assets, liabilities, and owner’s equity of a business entity as of a specific date, usually at the close of the last day of a month or a year. 8. Financial statements are prepared. 9. Closing entries are journalized and posted to the ledger. 10. A post-closing trial balance is prepared. 7. Types of Adjusting Entries: 1. Prepaid expense (deferred expense) 2. Unearned revenue (deferred revenue) 3. Accrued revenue (accrued asset) 4. Accrued expense (accrued liability) 5. Depreciation expense Each entry will always affect both a balance sheet and an income statement account. 8. Closing Entries: 1. Revenue account balances are transferred to an account called Income Summary. 2. Expense account balances are transferred to an account called Income Summary. 3. The balance of Income Summary (net income or net loss) is transferred to the owner’s capital account. 4. The ba