ACCOUNTING CYCLE

• The accounting cycle is the process by which financial information is recorded, processed, summarized, reported, users.toand communicated
• It is mandatory for a profit or non-profit entity to have an accounting system, whether manual or computerized.
• Designing an accounting system begins with the chart of accounts.
• Entities are required to submit the Statement of Profit or Loss, Statement of Financial Position, Statement of Cash Flows, and the Trial Balance attached to their income tax return.
• The Statement of Profit or Loss shows the financial performance of a business entity.
• The Statement of Cash Flows shows the inflows and outflows of cash and other assets.
• Accounting information is used only by external users with a financial interest in a business enterprise.
• Net income is computed by deducting costs and expenses from revenues, and it should equal the cash balance.
• The accounting cycle is a series of sequential steps or procedures performed to accomplish the accounting process.
• Generally accepted accounting principles are standards that indicate how to report economic events.
• The Matching principle dictates that expenses incurred to generate revenue must be recorded during the period when the corresponding revenue is generated.
• The first step in the accounting cycle is the analysis of business transactions and the recording of these transactions in the general ledger.
• Transactions are recorded in the general journal.
• The general journal is called the book of original entries, where balances of various accounts can be found.
• A single journal entry consists of one debit and one credit entry.
• The worksheet preparation helps facilitate the preparation of financial statements.
• The financial statements are prepared in this order: Statement of Profit or Loss, Statement of Changes in Owner’s Equity, Statement of Financial Position, Worksheet, and Statement of Cash Flows.
• The worksheet is not a financial statement.
• Merchandise inventory is debited when inventory is purchased and cost of goods sold is debited when inventory is sold.
• Sale of inventory requires a credit to Cost of Goods Sold.
• The matching principle requires that expenses be matched with the period in which they are incurred.
• Withdrawal of merchandise by the owner requires a credit to Merchandise Inventory.
• When revenue is earned, assets increase, owner's equity decreases, and liabilities decrease.
• The general journal is considered necessary but optional in the accounting process.
• In a service business, the section in the Statement of Profit or Loss that is unusual is cost of goods sold.
• When a purchaser of merchandise is allowed by the seller a reduction of the original price for defective goods, the purchaser will be issued a credit memorandum.
• The acquisition of office supplies as a payment from a credit customer would result in an increase in one asset and a decrease in another asset.
• The historical cost basis principle is a principle that requires financial statements to be prepared based on historical cost.
• When the company uses the periodic inventory method of accounting for inventories, the Merchandise inventory account does not change until before the adjusting entry is prepared at the end of the year.
• Purchase discount is a contra cost account and appears in the Statement of Financial Position.
• Interest accrued on a note received one month ago would be recorded as an accrual entry.
• The revenue recognition principle states that revenue should be recognized when it is earned.
• The full disclosure principle requires important facts that would have an effect on an investor’s decisions to be included in the financial statements.