3. Learning Objectives
By the end of this presentation, students
should be able to:
• Define fixed, current and long-term assets
and liabilities
• Define ‘Real/Permanent Accounts’ and
‘Temporary/Nominal Accounts”
• List and explain the steps in the financial
accounting cycle
• Define the term ‘Debit and Credit’
• Explain the ‘Debit/Credit Rule’
4. Fixed/Long Term Assets and
Current Assets
• A Current Asset is an asset which is
going to be consumed within one yar
or financial period, whichever is
longer e.g. Accounts Recievable
• A Fixed or Long Term Asset is an
asset which will be used over more
than one financial period e.g
Buildings and Land
5. Real/Permanent Accounts Vs.
Nominal/Temporary Accounts
• In accounting, the elements are further
broken down into Real or Permanent
Accounts and Temporary/Nomial Accounts
• The Real/Permanent Accounts are the
‘skeleton’ of the business and always carry
a balance
• The Temporary/Nominal Accounts record
changes in the Real/Permanent Accounts
and always close at the end of the financial
period
6. Accounting Equation - Long
Form
• Assets + Expenses = Capital +
Liabilities+ Revenue
• Asset, Capital and Liability
Accounts are Permanent or Real
Accounts and are found on the
balance sheet
• Expense and Revenue Accounts are
temporary or nominal accounts and
are found on the Income Statement
7. Accounting Cycle
• The financial accounting cycle
outlines the process by which
different transactions are recorded,
classified and organized into financial
statements.
8. The Accounting Cycle
Step One – Source Documents
• Usually, a business will undertake a number of
different transactions. The company will purchase
and sell inventory and other goods and services.
For the company to adequately record transactions
there must be sufficient proof that the transaction
occurred. For this reason, the accounting cycle
begins with taking information from a Source
Document, such as a receipt, check stub or invoice
which depicts the important details of a transaction
such as the date, amount transacted and
sometimes, the purpose of the transaction.
9. The Accounting Cycle
Step Two – Record to the Journal
• After the bookkeeper has received a source document, he or
she will record the transaction in a book of original entry,
called a Journal. A Journal is a diary which depicts the
transactions as they occur. The Journal is used strictly for
recording purposes; and the balances of accounts are not
affected when transactions are journalized. The journal
specifically assists the bookkeeper to record and analyze the
transactions.
Step Three – Post to the Ledger
• After the information has been recorded in the journal, the
accountant will copy the information recorded in the journal
and post the transaction amounts to the ledger accounts.
The process of posting is defined as the transfer of balances
from the journal to the ledger. During this step, the balances
of accounts change.
10. The Accounting Cycle
Step Four – Pre-Closing Trial Balance
• At this stage, the balances of accounts in the ledger are extracted and listed
by their normal balance (debit/credit). Then, all debits are added together
and all credits are added together to ensure the equality of debits and credits.
Step Five – Adjusting Entries
• The bookkeeper then performs adjusting entries, which are
transactions that occur at the end of the period. These adjusting entries are
normally to expense, asset and liability accounts and are performed to
adequately reflect revenues and liabilities.
Step Six – Closing of Accounts and Post Closing Trial Balance
• After adjustments, all accounts in the ledger are closed, and their balances
extracted. Another trial balance is drawn up.
Step Seven –Preparation of Financial Statements
• The balances in the post closing trial balance are used to draw up the
Income Statement and balance sheet.
11. The Debit/Credit Rule
• The Debit/Credit Rule
• Financial data is organized into individual records classified by
type (Assets, Capital, Liabilities, Expenses & Revenue) called
Accounts. An account has two sides into which information may
be entered.
• Debit (Left) – The left hand side of the Account/Accounting
Equation
• Credit (Right) – The right hand side of the Account/Accounting
Equation
• The Debit/Credit Rule basically states that:
• Assets & Expenses are increased with a DEBIT entry, or an entry
on the left hand side of these accounts. Conversely, these accounts
are DECREASED with a Credit entry, or an entry to the right
hand side of the account.
• Capital, Liabilities & Revenues are increased with a CREDIT
ENTRY, or an entry on the right hand side of these accounts.
Conversely, these accounts are DECREASED with a Debit entry,
or an entry to the left hand side of the account