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THE ACCOUNTING CYCLE, TRANSACTION CYCLE AND SOURCE DOCUMENTS (Transactions…
THE ACCOUNTING CYCLE, TRANSACTION CYCLE AND SOURCE DOCUMENTS
Accounting Cycle
Process starting when a transaction is first recorded, ending at time financial statements are prepared.
7 Steps:
Step 1
Record transaction in
books of prime entry
and keep source docs as evidence
Step 2
Record dual aspect in
general ledger
using double-entry (Computerised systems need only 1 entry)
Step 3
Prepare unadjusted
trial balance
using balances from general ledger
Step 4
Extend TB by making adjustments to match revenues/expenditures
Step 5
Prepare financial statements
Step 6
Close temp general ledger acc's, bring down adjusted bal's on permanent ledger acc's & reverse entries for accruals, prepayments, accrued expenses and accrued income
Step 7
Prepare a
post-closing trial balance
, preparing for next accounting cycle
Length of cycle
Management: As often as needed, usually monthly, quarterly and aunnually
Financial: Normally annually
Transactions and Recordable Events
Transactions occur when a party exchanges or promises to exchange a good or service with another party for money.
(When no money is involved, this is a
barter transaction
Sales & purchases
Goods purchased for use by business in current acc. period are
revenue expenditures
. For use over several periods are
capital expenditures
Accountants record financial effects of other events such as:
loss of inventory, loss of sales revenue and end of period adjustments
Cash and Accruals Basis of Accounting
Cash Transactions. Records are made at time of payment/receipt of cash. No adjustments needed (except errors)
Credit Transactions. Seller extends credit to buyer and buyer pays later. Transactions are recognised in period they relate to. Cash received does not often match revenue earned meaning adjustments are needed
Easily reflects economic performance and financial position
Allocation problem
questions how to allocate revenues/expenses over periods to determine profit/loss and carrying amount of assets/liabilities
Transaction Cycle
Starts with order of product/service, ends with exchange of product/service for payment.
Cash transactions can take as little as 1 minute. Normally till receipt is evidence of payment
Credit transactions take as long as the seller is willing to extend credit to the buyer. Invoices are evidence. Can give rise to risks
Data Sources & Source Documents
Purpose of documentation
Record process should a transaction take weeks/months/years
All parties are informed
Keeps track of (potentially) hundreds of thousands of transactions
Credit transactions (11 Steps)
1.
Price quotation,
2.
Purchase order,
3.
Sales confirmation,
4.
Delivery note & goods,
5.
Invoice,
6.
Debtors' statement,
7.
Debit note,
8.
Credit note,
9.
Payment by BACS or cheque,
10.
Remittance advice,
11.
Receipt
Recorded in books of original entry when the transaction is
"reasonably certain"
which can occur at 3 points
When payment is received
At time of delivery
Time the invoice is sent to customer
Comparing the Transaction and Accounting Cycles
Accounting cycles record and account for many transactions
Transactions cycles are recorded when the transaction is realised, be that at the point of delivery or the time of payment