Accounting Cycle and General Ledger

• The accounting cycle involves analyzing transactions, journalizing, and posting to the general ledger, which replaces T-accounts.

Chart of Accounts

• Assets typically begin with the 100s.
• Liabilities begin with the 200s.
• Owner's equities start with the 300s.
• Revenue accounts start with the 400s.
• Expenses are categorized under the 5, 6, 7, 8, and 900s.

Example Transactions and General Ledger Entries

• Noa invests $500 in her dance studio on Feb 1.
• Noa purchases ballet shoes for $250 cash on Feb 2.
• Noa buys a barre for $50 on Feb 3.
• Noa earns $100 from her first client on Feb 4.
• Example General Ledger Account: Cash
• Feb 1: $500 Debit, Balance $500
• Feb 2: $25 Credit, Balance $475
• Feb 3: $50 Credit, Balance $425
• Feb 4: $100 Debit, Balance $525.

Unadjusted Trial Balance

• The purpose is to ensure total debits equal total credits.
• Consists of a statement heading: WHO (Name), WHAT (Unadjusted Trial Balance), and WHEN (Specific Date).
• Accounts listed in ledger order.
• Ending balance from the ledger is transferred to either the debit or credit column.
• Assets and drawings are placed in the debit column.
• Liabilities, owner's equity, capital, and net income are placed in the credit column.
• Total debits must equal total credits.
• Entering the wrong number in both the debit and credit entries will still balance but be incorrect.
• A trial balance will not catch this mistake.

Accrued and Unearned Revenue/Expenses

• Accrued Revenue: Revenue earned but not yet billed, recorded as an asset.
• Unearned Revenue: Payments received for services or goods not yet provided, recorded as a liability.
• Accrued Expenses: Expenses incurred but not yet paid, such as Wages Payable or Interest Payable.

Accrued Revenue Example

• Lily renovates a house for $200k; half is completed by December 31, 2023, and the other half by January 30, 2024.
• December 31: Debit Accrued Revenue $100k, Credit Revenue $100k.
• June 30: Debit Account Receivable $200k, Credit Revenue $100k, Credit Accrued Revenue $100k.

Depreciation

• Spreads the cost of a long-term asset over its useful life.
• Applies to capital equipment and buildings.
• Useful life and salvage value are estimated.
• All capital assets must be recorded at historical cost.
• Accumulated Depreciation is a contra-asset account, reducing the asset account.

Straight-Line Depreciation Method

• (Historical Cost - Salvage Value) / Useful Life
• Nico buys equipment for $5,000, expected to last 10 years, with a $500 salvage value.
• ($5,000 - $500) / 10 = $450 per year.
• December 31: Debit Depreciation Expense $450, Credit Accumulated Depreciation $450.

Temporary vs. Permanent Accounts

• Temporary accounts (Revenue, Expenses, Drawings, Income Summary) are closed out at year-end.
• Permanent accounts (Assets, Liabilities, Capital) carry into the following year.

Annual Depreciation Rate

• Calculated as Annual Depreciation Expense / Amortizable Cost

Declining Balance Method

• Largest depreciation amount is taken in the earlier years of the asset's life, resulting in lower net income initially.
• Does NOT consider salvage value.

Capital Cost Allowance (CCA)

• Maximum depreciation rate allowed for an asset class.
• Buildings: 5%
• Vehicles: 30%
• Equipment: 20%
• Calculated as Net Book Value x Depreciation Rate

Declining Balance Method Example

• Nico’s equipment costs $5000 and depreciates at 20%.
• Year 1: 20% x $5000 = $1000.
• Year 2: 20% x ($5000 - $1000) = $800.

Worksheet

• Columns for Trial Balance (DR/CR), Income Statement (DR/CR), and Balance Sheet (DR/CR).
• Assets: Trial Balance Debit to Balance Sheet Debit.
• Liabilities: Trial Balance Credit to Balance Sheet Credit.
• Owner's Equity: Trial Balance Credit to Balance Sheet Credit.
• Revenue: Trial Balance Credit to Income Statement Credit.
• Expenses: Trial Balance Debit to Income Statement Debit.
• Drawings: Trial Balance Debit to Balance Sheet Debit.

Adjustments

• Adjustments and adjusted trial balances are a key part of the accounting cycle

Accounting Cycle

• Analyze Transaction
• Journalize Entries
• Post to the Ledger
• Prepare Unadjusted Trial Balance
• Adjustments
• Adjusted Trial Balance
• Prepare Financial Statements
• Worksheet
• CCA: Capital Cost Allowance

Closing Entries

• Temporary accounts are closed off, versus permanent accounts, which are carried over.
• Income Summary: Debits Expenses, credits Revenue.
• Capital account is updated using the income summary.
• Ending Capital Balance = Beginning Balance + Net Income/Net Loss - Drawings.

Potential Test Question

• Focus on the difference between Unadjusted Trial Balance, Adjusted Trial Balance, and Post-Closing Trial Balance.

Closing off Expenses

• Interest, debit $1,500, close off with credit.
• Salaries, debit $97,745, close off with credit.
• Office, debit $4,000, close off with credit.
• Advertising, debit $38,000, close off with credit.
• Supplies, debit $2,000, close off with credit.
• Depreciation, debit $7,680, close off with credit.
• Rent, debit $36,000, close off with credit.
• Store, debit $9,000, close off with credit.
• To close off expenses to income summary, credit each expense account.