2024-04-11

Thursday, April 11th, 2024

Trying to define yourself is like trying to bite your own teeth.

— Alan Watts

MGT011A Lecture: accounting cycle - analyze, record steps

• accounting cycle
  • analyze: Is this transaction relevant?
  • record
  • adjust
  • report
  • close
• accounting cycle: the analyze step
  • accounting transaction: an economic event that must be recorded in accounting records
    • could be anything that is a part of the accounting equation (e.g., assets, revenue, expenses, etc)
  • some business activities aren’t relevant and thus aren’t included in the accounting records
  • double-entry accounting: an accounting transaction affects at least 2 elements (could affect the same term — like assets) from the basic accounting equation (assets = liabilities + equity); also ensure that the two sides are in balance after the transaction
  • ending retained earnings = beginning retained earnings + net income - dividends
    • net income = revenue - expenses
  • expanded accounting equation
    • assets = liabilities + equity
    • assets = liabilities + common stock + retained earnings
    • assets = liabilities + comon stock + beginning retained earnings + net income - dividends
  • example transactions
    • person investing $30,000 in a new company’s stocks
      • both assets and equity increases by $30,000; equation is balanced
    • prepaying rent for company’s location
      • only assets changed: cash decreased, but prepaid rent (also considered rent) increased
    • taking out a loan (with interest)
      • assets (cash) increases and liabilities (notes payable) increases; balanced
      • the interest is considered a financing expense that is only recorded when paid
    • paying salary
      • assets (cash decrease) and expenses increase; since expenses are negative in accounting equation, so equation is balanced
• accounting cycle: the record cycle
  • once an accounting transaction has been identified, record this transaction
  • concepts
    • account: an individual record that increases or decreases the company’s asset/revenue/expense/liability/equity/etc
      • types of accounts: cash, equipment, wage expense, etc
    • chart of accounts: a list of all types of accounts within the company
    • accounting doesn’t use positive/negative signs; use “debit” or “credit”
      • Debit doesn’t necessarily mean it’s a good thing (e.g., a debit to expenses isn’t great), vice versa.
      • normal balance: how an increase is recorded for a given type of account
        • Debit an asset account to increase its normal balance. Credit an asset account to decrease its normal balance.
        • Credit a liabilities or equity account to increase its normal balance. Vice versa for debiting.
    • 
    • DEALER: acronym for normal balance for each account type
      • debits: Dividends (equity), Expenses (equity), Assets
      • credits: Liability, Equity, Revenue (equity)
    • general journal: records of accounting transactions
      • source document: each transaction needs to have proof that it actually happened (e.g., receipts, invoices)
  • steps
    • describe the nature, format, and purpose of the account
    • journalize (record in general journal)
      • date
      • for each transaction, the debits are listed first, followed by credits (credit entries are indented compared to debits)