w2

Accounting Cycle

Have to split up the cycle because it is hard to do accounting while business operations are happening

  • During the Year:

    • Record and Post external transactions [Measurement]

  • End of the Year

    • Record and post adjusting entries [Measurement]

      • Adjusting is because time

    • Prepare Financial Statement [Reporting]

    • Record and Post closing entries

Steps in Measuring External Transaction

  • What are ET?

    • Activities that can be witnessed by business documentation/activity

    • Receipt is documentation

1) Identify Accounts affected using source documents

2) Analyse impact of transaction on accounting equation

3) Assess whether transaction results in debit/credit

4) Record transaction in a journal

5) Post transaction to general ledger

6) Prepare trial balance

Steps 4-6 are automated already in this day and age!

Account

  • Record of transaction related to an asset, liability or stockholders' equity

Chart of accounts

  • List of all account names used to record transactions

Each transaction have a reactive effect on the mother of all equation

  • Assets increase, SE/L increases

  • Assets decrease, SE/L decrease

Sell Shares - Stock Certificate (Evidenced by documentation, hence ET)

  • Cash, SE

Share issuance is a increase in cash as the company receives cash from the stockholder

Accounting is done in the perspective of a company

IOU - Contract (Evidenced by Documentation, hence ET)

  • Instrument ⇒ Financial Loan Contracts

  • Payable/Liability

Equipment/Land (New Account) ⇒ Internal change of asset

  • Because it is resource that helps company generate money/benefit

Pay Rent in Advance

  • Prepaid Account/Prepaid Rent ⇒ pay first, use later; the right to use/claim the space

    • Allows company to reap future economical benefit/generate future revenue

Purchase Supplies

  • Why can we buy first and pay later?

    • Time delay with money; may not have the money on COD. [Credit line?]

      • Processing time for business transaction + governance (administrative friction)

    • If we ask for immediate payment, then we would not have proper accounting of funds

      • We sacrificing immediate payment for funds;

        • We can set credit limits

Thing has not been used to generate revenue ⇒ Hence, not under liabilities yet

Provide Services on Account

  • Giving service = revenue

  • Their promise to pay from the customer/Right to claim (future benefit) from the customer

Payment in advance

  • Owes service = liability

  • ⭐ Deferred Revenue (Liability), because company owes customer service

Pay Salaries

  • Salaries payable ⇒ Have not paid

  • Recognised as an expense.

  • Company is paying for unwaivering/unloyalty labour to generate revenue for a month

Cash Dividends

  • Less Pressure from shareholders

⭐ Revenue and Retained Earnings are directly related

⭐ Expenses and Dividends are inversely related

Deferred Revenue is a liability, as the company owes the customer a service

Debit and Credit

Debit = Left Side

-> When we debit an asset, it increases

Credit = Right Side -> When we credit an L/SE, it increases

⭐ DEALOR

  • Revenue ⇒ Credit

  • Dividends, Expenditure ⇒ Debit

Journal

  • dear diary, this account got credited/debited

  • Indent is mandatory (Credit)

  • ⭐ More for timeline tracking

General Ledger Account (for each account)

  • Each account's individual transactions and resulting account balance

  • Journal ⇒ Ledger using a process called posting

  • I posted 20,000 transactions 😭 in my intern

  • ⭐ More on the total values

T-accounting

  • Simplified version of general ledger account

  • Usually for working

Trial Balance

  • List all accounts and their balances at a particular date, showing total debits = total credits

  • Only for internal purposes

  • Assists us in preparing adjusting entries for internal transactions

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