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Learning Objectives
The main purpose of this unit is to introduce the knowledge about the accounting cycle. After learning this unit, you should be able to:
1. Identify what source documents are.
2. Know the classification of source documents.
3. Describe how the accounting cycle works.
4. Identify different types of journals.
5. Describe the features of ledgers.
6. Identify basic elements of source documents.
7. Master the main accounting terms related to the accounting cycle.
Lead In
Lily and Marry buy a computer for their company. They get the invoice first and here is the dialogue between them.
L: What shall we do with the invoice?
M: First, we should hand it to the accountant, and then the accountant will pay us the money.
L: Where will the invoice go then?
M: The accountant will record the amount in journals, and after that, the amount will be posted into ledgers.
L: Then the item transaction will be seen in the financial statements?
M: I know.
Accounting Cycle
Before we start to learn the basic process of accounting cycle, it’s necessary to have some knowledge of the accounting source documents. They are the beginning of an accounting cycle. Source documents are original documents, which record the occurrence and completion of economic transactions. They are usually filled in by the business clerks, according to the process of economic transactions.
There are many kinds of source documents, and the patterns are different from one another. Even so, there are some general elements in source documents: (1) name of source document; (2) fillingin company or department; (3) date and numbers; (4) company or person that
receives the document; (5) digest of transaction; (6) amount, price and sum.
Generally speaking, there are two kinds of source documents in use. They are the external source documents and the internal source documents. Internal source documents contain: (1) one-off document; (2) accumulated document; (3) collected source document. They exist for different uses. Filling in or getting the source documents is the start of an accounting cycle. Accounting cycle is a sequence of accounting procedures which include recording, classifying and summarizing the accounting information.
Generally speaking, the whole accounting cycle includes the following steps:
Economic transactions and source documents:When an economic transaction takes place, the business man writes accounting source documents, one copy for the seller, one copy for stub, and the last one for the accountant.
Journalizing: The accountant records this transaction into related journal.
Posting: This step is to post the accounting information to general and subsidiary ledgers.
The first three steps are done whenever a transaction happens.
Adjusting: After all transactions are collected, a trial balance sheet is made. During an accounting period, there will be some accrual or deferred transactions. According to the matching principle,
it’s necessary to adjust these items at the end of a month, a quarter or a year. Here, an adjusted trial balance needs to be made.
Preparing financial statements: On December 31, every corporation should provide the financial statements on the basis of adjusting entries.
Closing and Reversing: At the end of each accounting period, the balance of every profit and loss account must be zero. So the last step is closing. Usually an “Income Summary” is used in this step. The result of this step is a post-closing trial balance. At the beginning of a new accounting period, reverse the deferred or accrual items to the beginning balance. Then, another accounting cycle begins.
We can demonstrate the whole cycle as follows:
Figure 3-1
Activity：Discuss about the following question with your partner.
What have you learned from the accounting cycle?
Journals
In an accounting information system, the information about each business transaction is initially recorded in an accounting record called accounting journal. The journal is a day-to-day record. It is also called the book of original entry, recording each business transaction in order of date. The process of recording data in a journal is called journalizing or making a journal entry. At convenient accounting intervals, maybe one month, the debit and credit amounts recorded in the
journal are later posted to related ledgers. The ledger will be explained later.
Many businesses maintain several kinds of journals. The simplest type is called general journal. The general journal can be used to record all types of transactions. It contains the date of a transaction, the sort and the number of the document, the digest, related debit and credit ledgers, and the amount.
In addition to the general journal, there is another type of journal, the special journal. The special journal is widely used to register some specific business transactions. The most commonly used are cash receipt journal, cash payment journal, sales journal and purchase journal. In China, the cash receipt journal and cash payment journal are widely used all over the country.