Accounting Cycle

The accounting cycle is the process that businesses use to track their financial transactions and convert them into financial statements that provide valuable information about their financial performance. It involves several steps that include analyzing, recording, summarizing, and summarizing again to make sure that everything is in balance.

To start the accounting cycle, it is necessary to examine transactions and their details. Every transaction a business makes, such as purchasing inventory, paying expenses, or earning revenue, must be evaluated for its financial impact. These transactions are then classified into either revenues, expenses, assets, or liabilities.

Once the transactions have been classified, they must be recorded in the company's general ledger. This is a large record of all the company's financial transactions. To record these transactions, accountants will use double-entry bookkeeping, which means that every transaction will have at least two entries in the ledger, one debit and one credit.

After all of the transactions have been recorded, they must be summarized into financial statements. This is usually done at the end of the accounting period, which may be monthly, quarterly, or annually. There are three main financial statements that businesses need to prepare: the income statement, the balance sheet, and the statement of cash flows.

In the income statement, a company's earnings and expenditures are presented for a specific accounting cycle. This allows stakeholders to see how profitable the company was during the period.

At the end of the accounting period, the balance sheet displays a company's equity, liabilities, and assets. By offering a financial overview of a company's standing, the balance sheet serves as a tool for interested parties to evaluate the company's ability to pay back obligations.

The statement of cash flows demonstrates the cash that a company has received and given during the current accounting cycle. This is important because it shows how much cash the company has on hand, how it was generated, and how it was used.

After the financial statements have been prepared, the accounting cycle starts all over again for the new accounting period. However, before the start of the new period, accountants will often perform closing entries to adjust the balances in the ledger and ensure that all accounts are up to date.

Here are 10 different examples of accounting cycle in financial accounting, along with an explanation of each transaction and how it's applied in financial accounting:

1. A customer purchases $1,500 worth of goods on credit: In this transaction, a sale has been made, and an account receivable has been created. This means that the customer owes the company $1,500, and the company needs to record the sale in its books and update its accounts receivable balance.

2. The company purchases $2,000 worth of inventory on credit: In this transaction, a purchase has been made, and a liability has been created. The company owes the supplier $2,000, and it needs to record the purchase in its books and update its accounts payable balance.

3. The company pays $1,000 in rent for the month: In this transaction, a payment has been made, and an expense has been incurred. The company needs to record the payment in its books and update its rent expense account.

4. The company receives a loan of $10,000 from a bank: In this transaction, a loan has been received, and a liability has been created. The company owes the bank $10,000, and it needs to record the loan in its books and update its notes payable account.

5. The company pays $500 in interest on a loan: In this transaction, an expense has been incurred, and a payment has been made. The company needs to record the payment in its books and update its interest expense account.

6. The company sells a piece of equipment for $5,000: In this transaction, a sale has been made, and an asset has been disposed of. The company needs to record the sale in its books and update its cash account, as well as any other relevant accounts such as equipment, accumulated depreciation, gains, and losses.

7. The company accrues $1,500 in salaries payable at the end of the month: In this transaction, an expense has been incurred, but no payment has been made yet. The company needs to record the accrual in its books and update its salaries expense account, as well as its salaries payable liability account.

8. The company receives $2,000 in cash from a customer who owed money: In this transaction, a payment has been received, and an account receivable has been collected. The company needs to record the payment in its books and update both its cash and accounts receivable accounts.

9. The company issues $100 in dividends to its shareholders: In this transaction, a distribution of profits has been made. The company needs to record the payment in its books and update its dividends payable account.

10. The company adjusts its bad debt expense to an estimated $500: In this transaction, an adjustment has been made to account for the possibility of not collecting on some accounts receivable. The company needs to record the adjustment in its books and update its bad debt expense account.

Here is a sample accounting problem based on accounting cycle in financial accounting system, along with the solution:

Transaction 1: The company purchases $3,000 worth of inventory on credit from a supplier.

Transaction 2: The company sells $4,500 worth of inventory to a customer on credit.

Transaction 3: The company receives $1,500 from the customer for the credit sale.

Transaction 4: The company pays $1,500 to the supplier for the inventory purchase.

Transaction 5: The company receives a $2,000 loan from the bank.

Transaction 6: The company pays $500 in interest on the loan.

Transaction 7: The company pays $1,000 in rent for the month.

Transaction 8: The company purchases a delivery truck for $10,000 cash.

Transaction 9: The company sells old equipment for $2,500 cash, with a cost basis of $3,000.

Transaction 10: The company accrues $1,000 in salaries payable at the end of the month.

Transaction 11: The company records $500 in depreciation expense for the month.

Transaction 12: The company pays $1,200 in utilities expense for the month.

Transaction 13: The company receives $3,000 in cash for services provided to a customer.

Transaction 14: The company incurs $900 in advertising expenses for the month.

Transaction 15: The company records a $50 bad debt expense adjustment for the month.

Transaction 16: The company declares and pays $500 in dividends to shareholders.

Transaction 17: The company records $2,000 in prepaid insurance at the end of the month.

Transaction 18: The company has $2,500 in petty cash, with a $200 cash overage.

Transaction 19: The company receives a customer complaint and promises a refund of $250.

Transaction 20: The company pays $400 in repairs on the delivery truck.

Solution:

1. The company records a $3,000 purchase on accounts payable.

2. The company records a $4,500 sale on accounts receivable.

3. The company records a $1,500 payment on accounts receivable.

4. The company records a $1,500 payment on accounts payable.

5. The company records a $2,000 loan on notes payable.

6. The company records a $500 interest expense on interest payable.

7. The company records a $1,000 rent expense on rent payable.

8. The company records a $10,000 purchase of delivery truck on cash and delivery truck asset.

9. The company records a $2,500 sale of old equipment on cash and gain on sale of equipment account.

10. The company records $1,000 in salaries expense and salaries payable liability.

11. The company records $500 in depreciation expense and accumulated depreciation.

12. The company records $1,200 in utilities expense on utilities payable.

13. The company records $3,000 in cash and service revenue.

14. The company records $900 in advertising expense on advertising payable.

15. The company records a $50 bad debt expense adjustment on allowance for doubtful accounts.

16. The company records a $500 dividend payment on dividends payable.

17. The company records $2,000 in prepaid insurance asset and cash payment.

18. The company records the $2,500 petty cash fund and $200 cash overage in cash account.

19. The company records a $250 refund liability for customer complaint.

20. The company records $400 in repairs expense and accounts payable.

Here are narrations, sample scenarios, analysis, and evaluation for each of the given...