Chapter Two & Three

Accounting Cycle
Financial Statements
Starting point in study of Accounting
Financial process is stared with recording of
financial transaction or data and it ends with
Financial statement preparation.
Balance Sheet (Statement of Financial Position)
Section of Balance sheet
1. Heading section (Heading part)
The Heading part includes three lines
Cont-------
Line 1- Name of the company
Line 2- Type of the statement prepared
Line 3- Specific date financial statement prepared
Body part of the Financial statement
The body part of the statement includes three sections
1. Asset 2. Liability 3. Stockholders equity
Cont-------
Types of Assets
1. Current Asset (Cash, A/receivable,
Inventory, Supplies, Pre-paid
insurance, pre-paid rent---)
2. Fixed Asset (Long term Assets)
Tangible Assets
Intangible Assets
Natural resources
Cont ---------
Liabilities
A. Current liabilities
B. Long term Liabilities
Capital
A. Sol proprietor ship (owners equity)
B. Partnership (Capital of X,Y)
C. Corporation (Commons tock, Preferred
stock)
Cont------
Increased in owners equity
Investment by owners
Earnings from the profitable operation
Decreased on owners equity
Distribution of cash or other asset to owners
Losses from the operating activity of the firm
Owners equity on:- Sole proprietorship, Partnership and
corporation
Accounting Equation
Asset = Liabilities + Capital (owners equity)
Effects of Business transaction
- Business transaction
- Rules of Debits and Credits
- Normal Balance side and opposite to Normal Balance
side.
Example of sample transactions
1. ABC Co. Invested 80,000 by Issuing 8,000 stocks 10 par
Value.
Cont-----
2. Purchased Land with 52,000.00 on cash.
3. Purchased a Building with an amount of 36,000 (6,000
paid in cash and 30,000 on account issued a interest
bring Note)
4. Purchased office equipment on with 13,800
5. Sales of office equipment on account 1,800
6. Collection of Accounts receivable of 600.00
7. Cash paid to office equipments purchased on account
6,800.00.
Accounting Cycle
Chart of Account
General Journal
Ledger Account (Posting)
Un adjusted Trial Balance
Adjustment
Adjusted Trial balance
Financial Statements
Clothing Entry
Post closing Trail Balance
Chart of Accounts
Account Title Account No.
Assets:
Cash …………………………………………………………… 1
Accounts Receivable ……………………………………… 4
Land …………………………………………………………… 20
Building ……………….……………………………………... 22
Office Equipment ……….…..…………………………… 25
Liabilities:
Notes Payable ……..………………………………………… 30
Accounts Payable …………………………………………. 32
Stockholders” Equity:
Capital Stock …..…………………………………………… 50
Retained earnings ……………..…..…………………… 55
Sample General Journal
Date Account Title P/Re Debit Credit
2001 Cash 01 80,000.00
Feb 1 Capital Stock 50 80,000.00
3 Land 20 52,000.00
Cash 01 52,000.00
5 Building 22 36,000
Cash 01 6,000.00
Notes payable 30 30,000.00
17 Office Equipment 25 13,800.00
A/payable 32 13,800.00
20 Accounts Receivable 4 1,800.00
Office equipment 25 1,800.00
25 Cash 01 600.00
A/Receivable 4 600.00
30 A/payable 32 6,800.00
Cash 01 6,800.00
General Ledger Account
Forms of Ledger Account
Acct Title Cash Account Number 01
Date Explanation Ref. Debit Credit Balance
2011
Febr. 1 Page 01 80,000 80,000
3 Page 01 52,000 28,000
5 Page 01 6,000 22,000
25 Page 01 600 22,600
30 Page 01 6,800 15,800
Trial Balance
It used to check the equality between
Debits and Credits
The Trial balance is a two columns
GREENHILL REAL ESTATE
Trial Balance
February 28, 2011

Cash ……………………………………… $ 15,800

Accounts Receivable ………………. 1,200
Land …………………………………….. 52,000
Building ……………….………………. 36,000
Office Equipment ……….…..……… 12,000
Notes Payable …………………………. $ 30,000
Accounts Payable …………………… 7,000
Capital Stock …..……………………. 80,000
$117,000 $117,000
What is Net Income
 Net income is net increased on owners
equity from the profitable operation and the
opposite is for Net loss
 Income Statement is a one page financial
statement which summarizes the business
entity over a specified period of time
 Net income= Revenue> Expense
 Net Loss = Revenue < Expense
Cont--------
Revenues:- Sales of Goods and Services
Expenses :- Cost incurred to Goods and services
to
purchased or produced
Adjusting Entry
Pre paid Assets
Unearned revenue
Deprecations
Cont-----
Deprecation Methods
1. Straight line method
2. Unit of production methods
3. Sum of the years digits method
4. Double decline methods
Entry
Deprecation Expense xxx
Accumulated deprecation xxx
Cont------
Clothing entry
Clothing is getting a Zero balance of
Temporary accounts
Transferring of the balance of Revenues and
Expenses to capital Accounts
Closing Revenue Accounts
Closing Expense Accounts
Closing of Income summery Account
Cont------
Post clothing Trial Balance
Accounts list in post clothing trial balance
Asset
Liability
Capital