question archive 1) What are the steps in the accounting cycle? 2
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1) What are the steps in the accounting cycle?
2. Describe the accounting equation that is used to analyze transactions.
3. What considerations must be taken into account when analyzing transactions?
4. What are the categories of transactions, and what types of transactions can be found in each?
5. What is included in a journal entry?
6. What is involved in posting a journal entry to the general ledger?
7. How is a trial balance prepared?
8. What information should be included in a ten-column worksheet?
9. How should adjusting entries be made?
10. Which financial statements must be prepared after the adjusted trial balance is complete?
11. What are the types of closing entries?
12. What is listed in the post-closing trial balance?
"What are the steps in the accounting cycle?"
1st Step - Analyze the business transaction and economic event
2nd Step - Journalize or record journal entries
3rd step - Post the journal entries to ledgers
4th step - Prepare unadjusted trial balance
5th step - Journalize and post adjusting entries
6th step - Prepare adjusted trial balance
7th step - Prepare financial statements
8th step - Journalize and post journal entries
9th step - Prepare post-closing trial balance
"Describe the accounting equation that is used to analyze transactions."
Accounting equation: ASSETS = LIABILITIES + EQUITY
Expanded accounting equation: ASSETS = LIABILITIES + (OWNER'S CAPITAL - OWNER'S DRAWINGS + REVENUES - EXPENSES)
This means that for every transaction, both left side and right side of the equation should be balance. For example, increase in asset, there is increase in liability. Or increase in asset, there is decrease in another asset. And so on. Just ensure that transactions and journal entries are consistent with accounting standards and acceptable practices.
"What considerations must be taken into account when analyzing transactions?"
One consideration is whether a specific transaction is a valid economic transaction that requires recording. For example, hiring an employee is not a recordable one upon hiring. Another consideration is to ensure compliance with applicable accounting reporting standards and acceptable practices. Further, another consideration is the business model of the organization and the industry of the business as there might be some rules applicable to certain industries and businesses.
"What are the categories of transactions, and what types of transactions can be found in each?"
Major categories of accounts / transactions include ASSETS, LIABILITIES and EQUITY. Assets are those properties, equipment, cash that are owned and controlled by the organization. For example, when the company purchase computers, this transaction means that there is an increase in equipment under assets. Liabilities are those owed to creditors. For example, when the company purchase supplies on account, there is an increase in supplies (assets) and increase in accounts payable (liability). Equity is the net worth of the business after deducting liabilities from assets. For example, revenues increase equity while expenses decrease equity.
"What is included in a journal entry?"
A journal entry includes both a debit to one account and a credit to another account. Increases to assets, owner's drawings and expenses are DEBIT while decreases to these are CREDIT. On the other hand, increases to liabilities, owner's capital and revenues are CREDIT while decreases to these are DEBIT.
A typical journal entry is as follows:
Dr. Account Title <amount>
Cr. Account Title <amount>
"What is involved in posting a journal entry to the general ledger?"
General ledger is grouped per account title. In order to post a journal entry to the general ledger, all debits in the journal entries relating to a specific account should be posted to the LEFT side of that specific account in the general ledger. All credits
in the journal entries relating to a specific account should be posted to the RIGHT side of that specific account in the general ledger. For example, if the journal entry is debit to cash and credit to accounts payable, the amount in the "debit to cash" must be posted on the left side of the Cash account in the general ledger.
"How is a trial balance prepared?"
All account titles are on the left and there are columns for DEBIT and CREDIT on top. The balance on the ledger after all posting should be transferred to the trial balance. The objective is to determine if DEBIT = CREDIT. If there is a variance on debit and credit, there is something wrong in the process.
"What information should be included in a ten-column worksheet?"
The following information are included in a ten-column worksheet (There is a debit and credit column for each of these.):
"How should adjusting entries be made?"
Adjusting entries are necessary for some transactions to properly reflect the values of various accounts. For example, there should adjusting entry on prepaid rent (asset) in order to properly reflect the rent expense for the period. Further, there should be adjusting entry for unearned service revenue (liability) in order to properly reflect the service revenue for the period. Many other accounts need proper measurement and recognition for the financial statements and it can be done through adjusting entries.
"Which financial statements must be prepared after the adjusted trial balance is complete?"
These statements can be prepared:
"What are the types of closing entries?"
Various closing entries as follows:
Note for sole proprietorship, owner's capital is used instead of retained earnings. And owner's drawings is also closed to owner's capital.
"What is listed in the post-closing trial balance?"
All permanent accounts are listed in the post-closing trial balance. There are no temporary accounts anymore such as revenues and expenses as they are already closed in the closing journal entries.