Teoria UD 4 PDF - Accounting Cycle

## Introducción al ciclo contable * **Premise:** Businesses are expected to continue operating indefinitely unless proven otherwise. * **Periodicity:** Business activities are divided into periods to: * **Mercantile:** Meet legal requirements of presenting annual financial statements. *...

## Introducción al ciclo contable * **Premise:** Businesses are expected to continue operating indefinitely unless proven otherwise. * **Periodicity:** Business activities are divided into periods to: * **Mercantile:** Meet legal requirements of presenting annual financial statements. * **Tax:** Calculate and pay annual taxes based on profits. * **Financial:** Provide management with essential financial information. * **Standard Period:** The most common period is a year (January 1 to December 31). * **Economic Exercise:** The yearly period is called the "economic exercise." * **Accounting Cycle:** A set of activities undertaken during an economic exercise to provide summarized financial information to users: * **Mercantile** and **Tax** purposes. ## Key Operations of the Accounting Cycle: 1. **Initial Inventory and Balance Sheet:** * A snapshot of the company's assets, liabilities, and equity at the start of the period. 2. **Journal:** A chronological record of all transactions: * Opening entry of the accounting system. * Entries for each transaction during the period. * Adjustment or results entries at the end of the period. * Closing entry of the accounting system. 3. **Ledger:** A more detailed summary of individual accounts. 4. **Trial Balance:** Comparison of account balances. 5. **Closing Balance Sheet:** A final snapshot of the company's assets, liabilities, and equity at the end of the period. ## The Principle of Business in Operation * Considered a foundation for accounting principles. * Assumes the business will continue to operate in the foreseeable future. * This principle emphasizes ongoing business operations, not liquidation or value determination for transfer. ## Financial Statements * **Annual Statements:** * Complied with a twelve-month period. * Exceptions: Inception, corporate restructuring, or dissolution. ## Development of the Accounting Cycle * **Illustrative Example:** A company called ANIOL, SA, has a beginning inventory of assets: * Cash on hand: € 12,000 * Bank account: € 25,000 * Building: € 120,000 * Land: € 80,000 * Vehicle: € 20,000 * Furniture: € 5,000 * Outstanding payment for purchases: € 4,000 * Inventory: € 8,000 ## Initial Balance Sheet for ANIOL, SA | **Active** | **Amount** | |:-------------|:-----------| | **Non-current Assets** | | | Terrenos y bienes naturales | € 80,000 | | Construcciones | € 120,000 | | Mobiliario | € 5,000 | | Elements of Transport | € 20,000 | | **Current Assets** | | | Inventory | € 8,000 | | Cash (€) | € 12,000 | | Bank account (€) | € 25,000 | | **Total Active** | € **270,000** | | **Equity and Liabilities** | | | **Equity** | | | Capital Stock | € 266,000 | | **Current Liabilities** | | | Suppliers | € 4,000 | | **Total Equity and Liabilities** | € **270,000** | ## Inventory vs. Balance Sheet * **Inventory:** A detailed list of all the company's assets, liabilities, and equity. * **Balance Sheet:** A summarized version of the Inventory. ## The Journal and Ledger * Journal records all transactions chronologically. * Ledger provides a summary of the financial position of each account. ## Opening Transaction * Journal Entry: The process of initializing an account. * Includes assets on the Debit (left) and equity and liabilities on the Credit (right). ## Journal Entry: **Debit** * Terrenos y bienes naturales € 80,000 * Construcciones € 120,000 * Furniture € 5,000 * Elements of Transport €20,000 * Inventory € 8,000 * Cash (€) € 12,000 * Bank Account € 25,000 **Credit** * Capital Stock € 266,000 * Suppliers € 4,000 ## Ledger Summary | Account | Debit (€) | Credit (€) | |---|---|---| | Capital Stock | 0 | 266,000 | | Terrenos y bienes naturales | 80,000 | 0 | | Construcciones | 120,000 | 0 | | Furniture | 5,000 | 0 | | Elements of Transport | 20,000 | 0 | | Inventory | 8,000 | 0 | | Cash (€) | 12,000 | 0 | | Bank Account (€) | 25,000 | 0 | | Suppliers | 0 | 4,000 | ## Transactions during the Economic Exercise The accounting cycle continues as the company engages in various transactions. Example transactions include: * Purchases: Merchandise bought on account. * Sales: Goods sold on account. * Payment for purchases: Payment for goods bought on account. * Payment of Accounts Payable: Payment for suppliers’ invoices. * Sales receipts. ## Recording Transactions * Transactions are recorded in both the Journal (chronologically) and the Ledger (account summaries). * Transactions must be recorded in accordance with double-entry bookkeeping. ## Trial Balance * Provides a snapshot of all account balances at a particular time. * Not an assurance of accuracy (it only verifies if debits = credits). * Used to perform periodic verification of the accounting system, identify errors, and as a basis for preparing financial statements. ## Financial Statement Preparation * **Closing entries:** Adjustments made at the end of an accounting period, including: * Accrued expenses and income. * Depreciation. * Inventory adjustments. * **Income Statement:** Reports revenues and expenses (the result of the economic exercise). * **Balance Sheet:** Shows the financial condition of the company at a specific point in time. ## Summary of Accounting Cycle 1. Begin with the initial inventory and balance sheet. 2. Record all transactions in a journal (chronological order) and ledger (by account). 3. Prepare a trial balance after each period. 4. Perform closing entries at the end of the accounting period. 5. Prepare financial statements.