Accounting Cycle - Accounting Analysis - Financial Accounting
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What is the accounting cycle? The accounting cycle is often described as a process that includes the following steps: identifying, collecting and analyzing documents and transactions, recording the transactions in journals, posting the journalized amounts to accounts in the general and subsidiary ledgers, preparing an unadjusted trial balance, perhaps preparing a worksheet, determining and recording adjusting entries, preparing an adjusted trial balance, preparing the financial statements, recording and posting closing entries, preparing a post-closing trial balance, and perhaps recording reversing entries. Cycle and steps seem to be a carryover from the days of manual bookkeeping and accounting when transactions were first written into journals. In a separate step the amounts in the journal were posted to accounts. At the end of each month, the remaining steps had to take place in order to get the monthly, manually-prepared financial statements. Today, most companies use accounting software that processes many of these steps simultaneously. The speed and accuracy of the software reduces the accountant's need for a worksheet containing the unadjusted trial balance, adjusting entries, and the adjusted trial balance. The accountant can enter the adjusting entries into the software and can obtain the complete financial statements by simply selecting the reports from a menu. After reviewing the financial statements, the accountant can make additional adjustments and almost immediately obtain the revised reports. The software will also prepare, record, and post the closing entries
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Accounting Cycle - Accounting Analysis - Financial Accounting
- 1. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin The Accounting Cycle Reporting Financial Results Chapter 5
- 2. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Journalize transactions. Post entries to the ledger accounts. Prepare trial balance. Make end-of- year adjustments. Prepare adjusted trial balance. Prepare financial statements. Prepare after-closing trial balance. Journalize and post closing entries. The Accounting Cycle
- 3. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Learning ObjectiveLearning Objective LO5 To use financial statement information to evaluate profitability and liquidity.
- 4. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Did the business earn a profit or loss in the current period? What is the business’s future potential for a profit? Evaluating Profitability Evaluating Profitability Evaluating the BusinessEvaluating the Business Does the business have assets available to pay debts as they become due? Evaluating Liquidity Evaluating Liquidity
- 5. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Evaluating Profitability Evaluating Profitability Evaluating Liquidity Evaluating Liquidity Evaluating the BusinessEvaluating the Business Net Income Percentage Net Income Total Revenue = Return on Equity Net Income Avg. Stockholders’ Equity = Current Ratio Current Assets Current Liabilities = Working Capital Current Assets – Current Liabilities =
- 6. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Learning ObjectiveLearning Objective LO7 To explain how interim financial statements are prepared in a business that closes its accounts only at year-end.
- 7. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Monthly Quarterly Jan. 1 Dec. 31 Annually Many companies prepare financial statements at various points throughout the year. Many companies prepare financial statements at various points throughout the year. Interim Financial Statements Preparing Financial Statements Covering Different Periods of Time Preparing Financial Statements Covering Different Periods of Time
- 8. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Ethics, Fraud, and Corporate Governance Ethics, Fraud, and Corporate Governance A company should disclose any facts that an intelligent person would consider necessary for the statements to be interpreted properly. Public companies are required to file annual reports with the Securities and Exchange Commission (SEC). The SEC requires that companies include a section labeled “Management Discussion and Analysis” (MD&A) because the financial statements and related notes may be inadequate for assessing the quantity and sustainability of a company’s earnings.
- 9. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin Learning ObjectiveLearning Objective LO8 To prepare a worksheet and explain its uses.
- 10. © The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin The WorksheetThe Worksheet Balance Sheet Accounts Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 18,592 18,592 18,592 Accounts Receivable 6,500 (h) 750 7,250 7,250 Shop Supplies 1,800 (a) 600 1,200 1,200 Notes Payable 4,000 4,000 4,000 Accounts Payable 2,690 2,690 2,690 Income Statement Accounts Repair Service Revenue 171,250 (h) 750 172,000 172,000 Advertising Expense 3,900 3,900 3,900 Wages Expense 56,800 (f) 1,950 58,750 58,750 272,000 272,000 12,200 12,200 279,100 279,100 135,058 175,000 144,042 104,100 Net Income 39,942 39,942 Totals 175,000 175,000 144,042 144,042 Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OVERNIGHT AUTO SERVICES Worksheet For the Year Ended December 31, 2007 Trial Balance Adjustments Adjusted Trial Balance Income Statement
Editor's Notes
- Chapter 5: The Accounting Cycle—Reporting Financial Results
- This is a detailed schematic of the accounting cycle. It starts with recording transactions in the journal. At the end of each period, the books are closed and the next accounting period begins. The next chapter will continue to expand the accounting process to include all of the steps listed in this schematic. We view the accounting cycle as an efficient means of introducing basic accounting terms, concepts, processes, and reports. Please do not confuse your familiarity with this sequence of procedures with a knowledge of accounting. The accounting cycle is but one accounting process—and a relatively simple one at that. Accountants spend much of their time focusing on the more analytical aspects of their discipline. These include, for example: Determining the information needs of decision makers. Designing systems to provide the information quickly and efficiently. Evaluating the efficiency of operations throughout the organization. Assisting decision makers in interpreting accounting information. Auditing, which is confirming the reliability of accounting information. Forecasting the probable results of future operations. And, Tax planning.
- Learning objective number 6 is to use financial statement information to evaluate profitability and liquidity.
- Measures of profitability help users of financial information assess current profitability of a company and future potential for increased profits.Measures of liquidity help users assess the ability of the company to pay its debts when they fall due.
- Two common measures of profitability include the company’s net income percent, and its return on equity. When a ratio is calculated that has an income measure in the numerator and balance sheet measures in the denominator, an average must be used for the denominator. For the return on equity, add together the beginning balance in stockholders’ equity and the ending balance, then divide by two.Almost all companies calculate working capital and current ratio. Working capital is current assets less current liabilities. The current ratio is current assets divided by current liabilities.
- Learning objective number 7 is to explain how interim financial statements are prepared in a business that closes its accounts only at year-end.
- Almost all companies prepare annual and interim financial statements. An annual financial statement covers one year of operations. The year does not have to be a calendar year.Interim financial statements are usually prepared monthly and quarterly. Most large corporations publish quarterly reports for their shareholders.
- A company should disclose any facts that an intelligent person would consider necessary for the statements to be interpreted properly. Public companies are required to file annual reports with the Securities and Exchange Commission (SEC). The SEC requires that companies include a section labeled “Management Discussion and Analysis” (MD&A) because the financial statements and related notes may be inadequate for assessing the quantity and sustainability of a company’s earnings.
- Learning objective number 8 is to prepare a worksheet and explain its uses.
- A worksheet illustrates in one place the relationships among the unadjusted trial balance, proposed adjusting entries, and financial statements. A worksheet is prepared at the end of the period, but before the adjusting entries are formally recorded in the accounting records. On this slide we illustrated an abbreviated version of a worksheet. The dotted lines indicate that some accounts are not listed for illustrative purposes. To complete a worksheet follow these 5 steps. Enter the ledger account balances ion the Trial Balance columns. Enter the adjustments in the Adjustments columns. Prepare an adjusted trial balance. Extend the adjusted trial balance amounts into the appropriate financial statement columns. Total the financial statement columns and determine and record net income or net loss.