What is Worksheet: Types of Accounting

Worksheet
Multiple column sheets wherein all necessary information used for the preparation of the
financial statement is recorded in a systematic process is called a worksheet.

The worksheet is not a permanent account. It is not a part of journal or ledger. It is a device used
for an easy preparation of adjusting entries and financial statements.

The worksheet is a multi-column sheet or a computer spreadsheet where accountant writes, in

brief, information necessary for preparation of adjusting entries and financial statements.

In bigger organizations where the volume of accounts and adjustments are much more, the
possibility of error remains at the time of adjustment of adjusting entries with ledger accounts if
the worksheet is not prepared.

Preparation of financial statements correctly becomes complicated and sometimes is delayed. In

the present day world, it has become the practice of preparing worksheet in the big organizations
before preparation of financial statements.

Accountants make adjustments of adjusting entries with other relevant ledger accounts before
preparation of financial statements.
Before preparation of financial statements, the accountants want to be sure of the arithmetical
accuracy of accounts by making adjustments of adjusting entries with ledger accounts through
the worksheet and then go for the preparation of financial statements.

The worksheet is prepared at the end of accounting period before preparation of financial
statements.

3 Types of Worksheet are

1. General worksheet,
2. Detailed worksheet,
3. Audit worksheet.

They are explained below,

1. The general worksheet contains four to six pair columns. Generally, five pair columns
or ten columns worksheet can serve the purpose of general business. These five pair
columns are;
o Trial balance,
o Adjustment,
o Adjusted trial balance,
o Income statement, and
o Balance sheet.
2. The detailed worksheet is prepared for containing more detailed information over
general worksheet. Sometimes extra sheet containing columns are enclosed for
explaining particular items. The matters for which item-wise lists are to be prepared are:
o Accounts receivable and accounts payable lists,
o Production expenditure lists,
o Insurance premium lists etc.
3. Audit worksheet is used for preparing financial statements and lists for various uses of
business [Link] worksheet is prepared in the light of auditing of various items
included in the worksheet. It is an aid to audit work of a business concern.

The worksheet is a technique of accounting through which the accounting information is

integrated for adjustment and classification.

The main objective of the worksheet is to verify the accuracy of accounting information before
preparation of financial statements.

5 Simple Steps to Write and Prepare Ledger

Account
Business organizations needs to write and prepare ledger account wherein all the transactions of
are recorded permanently under different heads of accounts.
As per accounting principle the transactions just after their occurrence are recorded in the
primary book of account – journal in chronological order of dates with explanations. But it is not
possible to determine the complete results of transactions from journal.

That is, it is not possible to know the information like how much profit under what heads has
been earned, how much expenses under what head has been incurred, how much assets and
liabilities are there in a particular business concern from journals.

In order to know all these information the transactions of the same nature are to be recorded
under different heads or in separate accounts.

That is,

All the transactions relating to individual, organization assets, income and expenditure are
recorded under the same head of accounts-individual, organization, assets, income and
expenditure.
In this way if various transactions are recorded in different respective heads of accounts, it
becomes possible to determine the complete result of any account at the end of accounting
period.

So, it can be said that, the book wherein various entries of journal are posted in brief
permanently according to debit and credit under separate heads of accounts is called ledger.

How to Write and Prepare Ledger Account

1. Drawing the Form

Every leaf of account is divided into two equal parts by a bold vertical line or two sharp vertical
lines. The left side of it is debit side and the right side is credit side.

Thereafter,

both the sides are again divided into four columns i.e., this is divided into eight columns having
four in debit side and four in credit side. In first column of both the sides’ dates, the second
particulars, and the third journal folio and in the fourth amount are written.

2. Posting

The act of transferring the transactions from the journal to the respective accounts of ledger is
called posting. The two accounts involved in each transaction are maintained in the ledger.

The debit account of journal is posted in the debit side of that account and the credit account of
journal is posted in the credit side of that account.

In this regard it is to be carefully noted that at the time of posting in the debit side of the ledger
account, credit account of journal is to be written in particular column and in the credit side of
the ledger account debit account of that journal is to be written in particular column.
3. Folioing

The page of journal from which the journal entries are transferred to the particular ledger account
that page number is written in the folio column of ledger account and the page of the ledger
wherein the account is posted the number of that page is written in the journal in the ledger folio
column of journal.

In this way writing of page number of journal in the ledger and that of ledger in the journal is
called folioing.

4. Casting

The amount of debit and credit of each ledger account is totaled separately in both sides. In this
way totaling of debit and credit is called casting.

5. Balancing

After totaling of debit and credit of ledger accounts, it shows that total of both the sides is made
equal putting difference of both sides the account is considered balanced.

In this case nothing is left to be [Link] if the total of both the sides is unequal, in that case
difference is to be determined.

There after the amount of difference is added in deficit side to equalize both the sides. This sort
of difference between two sides of accounts is called balance.

The act of equalizing the total of both the sides by adding debit balance in the credit side and the
credit balance in the debit side is called balancing.

Debit balance: If the total amount of debit side is greater than the total amount of credit side of
the ledger than the difference between both the sides is called debit balance.

For example,

the total of debit of a particular ledger account is $ 10,000 and the total of credit of that ledger
account is $8,000, -then the difference between these two sides amounting $2,000 is a debit
balance.

As per rule of debit and credit under double entry system all expenditures and assets accounts
show debit balance. Therefore debit balances of ledger accounts mean expenditure and assets.

Credit balance: On the other hand, if the total of credit money column of a particular ledger
account is greater than that of debit money column, the balance is called credit balance.

For example,
the total of credit money column of a particular account is $5,000 and that of debit money
column is $4,000, the difference between these two amounts $ 1,000 is a credit balance.

All income and liability accounts always show credit balance i.e. credit balances of ledger
account mean incomes and liabilities.

Difference between Journal and Ledger with

Example
There is big difference between journal and ledger. Under double entry system the business
transactions are primarily recorded in journal and thereafter they are posted permanently in
classified form under different respective heads according to nature of transactions in Ledger.

So, it is a proven fact, both journal and ledger play important role in accounting process. Despite
so many similarities there are some differences between journal and ledger which are shown
below;

No Journal Ledger
 Ledger is the permanent and final book of
Journal is a subsidiary book of account. It is
1. accounts. It is termed as the means of
the store house of recording transactions.
classified transactions.
Transactions are recorded in journal in
Transactions are posted in ledger in classified
2. chronological order of dates just after their
form from journal.
occurrences.
Transactions are recorded in ledger in
Transactions are recorded in journal without
3. classified form under respective heads of
considering their nature of classification.
accounts.
In journal explanation of entries of In ledger explanations of entries of
4.
transaction are shown. transactions are not needed.
Generally the ledger account of ‘T’ form
contains eight columns – four in left and four
5. The format of journal contains five columns.
in right. But in statement format of ledger
account contains six columns.
Journal helps in preparing ledger accounts The object of ledger is to know income and
6.
correctly. expenditures of different heads.
Transactions are recorded in journal in Ledger is prepared according to nature of
7.
chronological order of dates. accounts.
The total results of transactions cannot be Results of particular head of accounts can be
8.
known from journal. known from ledger.
9. In journal ledger folio (L.F.) is written. In ledger journal folio (J.F.) is written.
Preparation of trial balance is not possible
10. Trial balance is prepared from ledger.
from journal.
It is not possible to prepare income statement Income statement is prepared with the ledger
11. at the end of a period from journal to know balances at the end of a period to know the net
profit or loss. profit, or loss.
Balance sheet cannot be prepared directly Balance sheet is prepared with the help of
12.
from journal. ledger balances.
Transactions are recorded in journal in the
13. Journal is the source of preparation of ledger.
light of voucher.
Each account in ledger has two sides.
The left side is called debit and the right side is
There is no debit side or credit side in money called credit under “T” format.
14.
columns in it for writing debit. But in statement form there are three money
columns for writing debit and credit amount
and also for balance.
Recording of transaction in journal is called Recording of transactions in ledger is called
15.
journalizing. posting.
16. There is no scope of balancing in Journal. Balances are drawn in ledger accounts.
Journals are generally classified into eight Ledgers are generally classified into two
17.
groups according to practice. groups.
18. Journal does not start with opening balance. Some ledger accounts start with opening
It is prepared from current transactions balance which is the closing balance of
 occurred. previous year.

What is Accounting Ledger? Explained with

Examples.
Ledger is an account to record, categorize and sort transactions, for maintaining balance of
company’s each assets, liabilities, owners’ equity, revenue, expenses accounts so that balance
sheet and income statement can be properly prepared.

The word Ledger means shelf to keep something. As various kinds of things are kept in shelf in
order similarly every account of business concern is recorded in the ledger separately or in
classified way.

That is why many people think that ledger is derived from the English word ‘ledge’. As per
accounting principle the transactions just after their occurrence are recorded in the primary book
of account – journal in chronological order of dates with explanations.

But it is not possible to determine the complete results of transactions from journal.
That is, it is not possible to know the information like how much profit under what heads has
been earned, how much expenses under what head has been incurred, how much assets and
liabilities are there in a particular business concern from journals.

In order to know all these information the transactions of the same nature are to be recorded
under different heads or in separate accounts.

That is, all the transactions relating to individual, organization assets, income and expenditure
are recorded under the same head of accounts-individual, organization, assets, income and
expenditure.

For example;

To record all the transactions with HSBC Bank under HSBC Bank Account or transactions
regarding salary-under salary account etc.

In this way if various transactions are recorded in different respective heads of accounts, it
becomes possible to determine the complete result of any account at the end of accounting
period.

So, it can be said that, the book wherein various entries of journal are posted in brief
permanently according to debit and credit under separate heads of accounts is called ledger.

Some definitions of ledger propounded by some famous writers are stated below;

Willium Pickles says;

Ledger is the destination of all entries made in the subsidiary book or journals.

Arthur Field House says;

Ledger is the permanent store house of all the transactions.

L. C. Croper says;

The book in which a trader’s transactions are recorded in a classified permanent form is called
the Ledger.

From the above discussion we can say that the book wherein all the transactions of business
organizations are recorded in a classified permanent form under different heads of accounts
transferring them from journal is called ledger.

Preparing Trial Balance From Journal and

Ledger (How To)
To prepare a trial balance, first, we need to know make sure the transactions are journalized and
have been posted to ledgers.

The final balance from the ledger needs to be properly placed on the debit and credit column
while preparing the trial balance, to make sure the accounting process is correct.

How to Prepare a Trial Balance

Business transactions are first recorded in the journal and thereafter these are posted in the ledger
under different heads of accounts.

It may be mentioned that transactions may directly be posted in the ledger accounts without
recording them in the journal.

At the end of a particular accounting period, a trial balance is prepared in a separate sheet of
prescribed form recording debit ledger balance, in debit column and credit ledger balances in
credit money column.

Besides ledger balances, cash balance and bank balance of cash book of that particular date are
also included in the trial balance.

Thereafter total of debit and credit money columns of a trial balance is calculated. Agreement of
trial balance is the conclusive evidence of the accuracy of the ledger and trial balance.

Format for Preparing Trial Balance

A short description of the format of the trial balance is given below:

1. Titles: In the middle of the format name of the company, trial balance and date of
preparation are written.
2. Accounts serial number: In this column, the serial numbers of ledger accounts are
written.
 3. Account Titles: The serial number of that account of the ledger which has been written
in the first column, the full title of that account is written in this column. For example,
Capital account, Furniture account, Cash account etc.
4. Ledger Folio: The number of the ledger page from where ledger balances are brought is
written in this column.
5. Debit balance: All debit balances of ledger accounts are written in this column.
6. Credit balance: All credit balances of ledger accounts are written in this column.

Ledger Account Balance and Trial Balance

Rules for recording debit ledger account balances and credit ledger account balances in debit
money column and credit money column of trial balance in absence of ledger account:

Ledger account balances to be recorded in Ledger account balances to be recorded in

debit money column credit money column
1. All assets [Link] liabilities:

Land, building, leasehold property, The loan, mortgage loan, accounts payable,
machinery, furniture, investment, notes notes payable, debenture, bank overdraft,
receivable, accounts receivable, cash, stock, etc..
goodwill, patents, trademarks, etc..
2. All expenses: 2. All incomes:

Wages expense, salary expense, supplies Rent revenue, discount income, interest
expense, advertisement expense, rent income, apprentice ship premium income
expense, repair expense, interest expense, etc..
commission expense, depreciation expense,
bad debt expense, discount expense, Items for
which payment is made: Owner’s goods
withdrawal, merchandise purchase.
4. Prepaid expense 3. Expense payable:

Prepaid insurance, prepaid rent, prepaid Salaries payable, rent payable.

advertisement, salary advance etc..
5, Accrued income: 4. Unearned income:

Interest on investment accrued, interest on Unearned rent, unearned premium, etc..

bank balance accrued, interest accrued on
notes receivable and accounts receivable.

5. Losses: 5. All types of reserves and provisions:

Cash lost, goods lost etc. General reserve, provision for doubtful
debts. Provision for discount on accounts
 receivable, etc..
6. Other items

6. Other items: Purchase return, capital, bad debt recovered.

Sales return, reserve for, discount on accounts

payable.

Important to remember:

1. Opening cash and bank balance are not shown in the trial balance as these are included in
closing cash and bank balances.
2. Closing stock is not shown in the trial balance because this remains included with
opening stock and purchase of the accounting [Link] if opening stock and purchase
remain absent in trial balance and adjusted purchase is shown in the trial balance, in that
case, the closing stock is shown in the debit money column of the trial balance.

Accounting Cycle – 10 Steps of Accounting

Process Explained
Accounting is an art as well as science which systematical process that identifies, records,
classifies and communicates the economic facts and figures of an organization. Accounting cycle
means the repetition of a complete sequence of accounting procedures in appropriate order
during each accounting period.

This process is a combination of a series of activities begin when a transaction take place and
end with its inclusion in the financial statements at the end of the accounting period. The
sequence of accounting procedures used to record, classify and summarize accounting
information is often termed the Accounting Cycle.

The term indicates that these procedures must be repeated continuously to enable the business to
prepare new up-to-date financial statements at reasonable intervals.

10 Steps of Accounting Cycle are;

1. Analyzing and Classify Data about an Economic Event.
2. Journalizing the transaction.
3. Posting from the Journals to the General Ledger.
4. Preparing the Unadjusted Trial Balance.
5. Recording Adjusting Entries.
6. Preparing the Adjusted Trial Balance.
7. Preparing Financial Statements.
8. Recording Closing Entries.
9. Preparing a Closing Trial Balance.
10. Recording Reversing Entries.

1. Analyzing and Classify Data about an Economic Event

Identifying the transactions from the events is the first step of accounting process. Events
are analyzed to find the impact on the financial position or to be more specific the
impacts on the accounting equation.
 Documents such as; a receipt, an invoice, a depreciation schedule, and a bank statement
etc. provides evidence that an economic event has actually occurred.

2. Journalizing the transaction

Transactions having an impact on the financial position of a business are recorded in the
general journal.

In the general journal, the transactions are recorded as a debit and a credit in monetary
terms with the date and short description about the cause of the particular economic
event.

3. Posting from the Journals to the General Ledger

Transactions recorded in the general journal are then posted to the general ledger
accounts. The accounts classify accounting data into certain categories and they are
recorded in general journal entries according to that classification.

Depending on the frequency of the transactions posting to ledger accounts may be less
frequent.

4. Preparing the Unadjusted Trial Balance

To determine the equality of debits and credits as recorded in the general ledger, an
unadjusted is prepared. It is a way to investigate and find fault or prove correctness of the
previous steps before proceeding to the next step.

Unadjusted trial balance makes the next steps of accounting process easy and provides
the balances of all the accounts that may require adjustment in the next step. Unadjusted
balance sheet is for internal use only.

5. Recording Adjusting Entries

Adjusting entries ensure that the revenue recognition and matching principles are
followed. To find the revenues and expenses of an accounting period adjustments are
required.

Adjusting entries are required to be is because a transaction may have influence revenues
or expenses beyond the current accounting period and to journalize to the events that not
yet recorded.

6. Preparing the Adjusted Trial Balance

 An adjusted trial balance contains all the account titles and balances of the general ledger
which is created after the adjusting entries for an accounting period have been posted to
the accounts.

It is an internal document and is not a financial statement. It helps to create the income
statement and balance sheet and doesn’t provide enough information for preparing the
cash flow statement.

7. Preparing Financial Statements

Financial statements are prepared from the balances from the adjusted trial balance. The
financial statements are made at the very last of the accounting period.

Cash flow statement, income statement, balance sheet and statement of retained earnings;
are the financial statements that are prepared at the end of the accounting period. This is
the output of the accounting process.

8. Recording Closing Entries

At the end of an accounting period Closing entries are made to transfer data in the
temporary accounts to the permanent balance sheet or income statement accounts.

Transferring the balances of the temporary accounts or nominal accounts (e.g. revenue,
expense, and drawing accounts) to owner’s equity or retained earnings account is used
because these types of accounts only affect one accounting period.

9. Preparing a Closing Trial Balance

To make sure that debits equal credits, final trial balance is prepared. As the temporary
ones have been closed only the permanent accounts appear on the closing trial balance to
make sure that debits equal credits.

10. Recording Reversing Entries

Posit closing entries is an optional step of accounting cycle. A reversing journal entry is
recorded on the first day of the new period for avoiding double counting the amount
when the transaction occurs in the next period.

Primary objective of the accounting cycle in an organization is to process financial information

and to prepare financial statements at the end of the accounting period.

Accounting cycle is a continuous and fixed process which needs to be followed accordingly.
Maintenance of continuity accounting cycle is important.
Types of Adjusting Entries in Accounting
Process
The process, through which an amount of money is added or deducted to from the ledger
balances to make the balances up to date, is called adjustment.

In this context Hermanson, Edwards and Salmons say, –

Adjusting entries are journal entries made at the end of an accounting period to change the
balances of certain accounts to reflect economic activity that has taken place but not yet been
recorded.

The economic activities, incurred but not identified by the accountant as business transactions,
are omitted from journal entries.

Put these are adjusted by means of adjusting entries before preparation of financial statement of
an accounting period.

All accrued income and expenses, incurred by an organization, are to be recorded in the income
statement, so that the true picture of income and expenses of a particular period is exhibited.

If all accrued income; and expenses incurred are not shown in the income statement, it becomes
incomplete, incorrect and confusing. Similarly if all assets, liabilities and owner’s equity are not
stated in the balance sheet correctly, it also becomes incorrect and confusing and does not reflect
the true financial position.

Since all interested parties remain eager to know various information, financial statements i.e.
income statement and balance sheet are to be prepared in every accounting period. For all these
financial statements the accountant classifies the life of business into several small periods.
Thereafter all economic activities are fixed for each period.

These periods are of short duration and are called accounting period. Generally an accounting
period is of one year, but sometimes it may also be of six or three months period.

As one year accounting period is called one accounting year or one financial year any period of
successive twelve months is called one financial year. But it may not be the same as one calendar
year.

For preparing annual statements correctly adjusting entries are needed. Before preparation of
financial statements the balances of accounts concerned are corrected and updated by giving
adjusting entries.

At the end of every accounting period income statement and balance sheet are prepared for
ascertaining profit or loss and financial position of an organization.

The correctness of such profit or loss and financial position depends on the proper adjustment of
income and expenditure.

Cash Basis Accounting versus Accrual Basis Accounting

Comparatively small organizations, educational institutions and professionals such as physicians,
lawyers and accountants keep accounts of all their income and expenditures on cash basis.

Under cash basis accounting process income is recognized when it is received in cash and
expenses are also recognized when these are paid in cash.

For example,

A service was offered in 2002 but the cash for it was received in 2003.

nder cash basis accounting process, it will be treated as income of 2003. Similarly under this
system the expenditure of 2002 if paid in 2003, will be treated as expenditure of 2003.

For this sort of faulty accounting of income and expenditure the cash basis accounting process is
generally not accepted as a proper accounting system.

Under accrual basis accounting sales or services, rendered in a particular accounting period, are
recognized as income for that period whether cash received or not.

Similarly under this system expenditures, incurred in a particular accounting period, are
recognized as expenditure whether cash paid for these or not in that particular period.
Therefore, under accrual accounting system the economic transactions, which have taken place
but not accounted for, are adjusted with balances of accounts concerned to get them updated by
means of adjusting entries.

Through adjusting entries financial statements can be prepared accurately.

Recognition of Revenue and Expenses

Determining the amount of income and expenses, shown in the financial statements of a
particular accounting period, is a Very complicated task. For that reason the accountants follow
two generally accepted accounting principles viz – revenue recognition principles and matching
principles.

According to revenue recognition principle the revenues, earned in a particular accounting

period, are revenue of that period. For example, sale price realized or receivable on account of a
particular accounting period is the revenue of that period.

Whether sale or service rendered in an accounting period is treated as income on occurrence or

on cash received depends on accounting principle. Generally merchandise or service is treated as
income when it is transferred.

For example,

Both cash sale of $ 10,000 and sale of $15,000 on account are sale income. In this case, cash
$10,000 and accounts receivable $ 15,000 will be shown in the balance sheet and sales $25,000
will be shown as income in the income statement.

The accountants recognize expense following the principle – expense follows income.

Therefore expense recognition is closely related to revenue.

For example

If expenditure is incurred for purchase of merchandise, sales revenue is generated.

There is no revenue without expenditure. Profit is determined after deduction of expenditure

from revenue.

Time of Preparation of Adjusting Entries

While preparing financial statements necessary adjusting entries are to be passed. Therefore if
the financial statements are prepared at the end of six months period in that case also necessary
adjusting entries are to be passed.
As per convention and some laws, business organizations report the results and financial position
of the business to the owners at least once in a year. That is why adjusting entries are required at
least once in a year for preparing financial statement correctly.

Types of Adjusting Entries

All Financial transactions, relating to a particular accounting period but

 not recorded as accrued income,

 outstanding expenses,
 transactions of capital items of a particular accounting period such as portion of properties,
 liabilities converted into revenue,
 income expenditure,
 depreciation,
 amortization,
 depletion unearned income.

Types of adjusting entries are discussed below:

1. Advances, and

2. Accruals.

Each of them is again of two types as stated below:

1. Advances

1. Advance payment of expenses: Cash payment of expenses and recording them property until
used or expiry of period.
2. Unearned Income: Unearned income received for cash and recorded as cash received and
liability till income accrued.

2. Accruals

1. Accrued Income: Revenue accrued but not yet received for cash or accounted for.
2. Outstanding Expenses: Expenses incurred but not yet paid or accounted for.

GAAP for Accounting Rules, Principles,

Assumptions
 Generally Accepted Accounting Principles may be defined as
those rules of action or conduct which are derived from experience and practice and when they
prove useful, they become accepted principles of accounting.

According to the American Institute of Certified Public Accountants (AICPA), the principles
which have substantial authoritative support become a part of the general accepted accounting
principles.

The main dispute in setting accounting standards is, “Whose rules should we play by, and what
should they be?” The answer is not nearly clear. Users of financial accounting statements have
both coinciding and conflicting needs for information of various types.

To meet these needs, and to satisfy the fiduciary reporting responsibility of management,
companies prepare a single set of general-purpose financial statements. Users expect these
statements presents the company’s financial operations fairly, completely and clearly.

The accounting profession has attempted to develop a set of standards that are generally accepted
and universally practiced. Otherwise, each economic entity would have to develop its own
standards.

Further, readers of financial statements would have to familiarize themselves with every
company’s peculiar accounting and reporting practices.

It would be impossible to prepare statements that could be compared and thus creating a chaos in
business and financial world.

This common set of standards and procedures is called generally accepted accounting principles
(GAAP). The term “generally accepted” indicates either that an authoritative accounting rule
making body has established a principle of reporting in a given area or that over time a given
practice has been accepted as appropriate because of its universal application.

Although principles and practices continue to provoke both debate and criticism, most members
of the financial community recognize them as the standards that over time have proven to be
most useful.
The major sources of GAAP come from the organizations; American Institute of Certified Public
Accountants (AICPA), Financial Accounting Standards Board (FASB), Securities and Exchange
Commission (SEC).

Accounting is universally necessary and anybody influenced by it; has influenced the formation
process of GAAP in various ways.

GAAP is composed of a fusion of over 2,000 documents that have developed over the last 60
years or so. It includes such items as FASB Standards, Interpretations, and Staff Positions; APB
Opinions; and AICPA Research Bulletins.

One of the major groups involved in the standard-setting process is the American Institute of
Certified Public Accountants. Initially it was the primary organization that established
accounting principles in the United States. Subsequently it relinquished its power to the FASB.

Since the enactment of GAAP; may affect many interests, much discussion occurs about who
should develop GAAP and to whom it should apply. User groups are possibly the most powerful
force influencing the development of GAAP.
User groups consist of those most interested in or affected by accounting rules. Some
accountants have said that politicization in the development and acceptance of generally
accepted accounting principles (i.e., rule-making) is taking place.

Some use the term “politicization” in a narrow sense to mean the influence by governmental
agencies, predominantly the Securities and Exchange Commission, on the development of
generally accepted accounting principles.

Others use it more broadly to mean the compromise that results when the groups responsible for
developing generally accepted accounting principles are pressured by interest groups such as;
SEC, American Accounting Association, businesses through their various organizations, Institute
of Management Accountants, financial analysts, bankers, lawyers, and so on.

The general acceptance of the accounting principles or practices depends on how well they meet
the following three criteria:

Three Main Criteria of GAAP

1. Relevance.
2. Objectivity.
3. Feasibility.

Let’s See what is what;

1. Relevance: A principle is relevant to the extent that results in information that is

meaningful and useful to the users of the accounting information.
2. Objectivity: Objectivity connotes impartiality and trustworthiness. A principle is
objective to the extent that the accounting information is not influenced by personal bias
or judgment of those who provide it. It also implies verifiability which means that there is
some way of ascertaining the correctness of the information reported.
3. Feasibility: A principle is feasible to the extent that it can be implemented without much
complexity or cost.

These criteria often conflict with each other, e.g. information about the value of a new product to
the inventor is indeed relevant but the best estimate of the value of a new product made by the
management is highly subjective.

Accounting, therefore, does not attempt to record such values. It sacrifices relevance in the
interest of objectivity. In developing new principles, the essential problem is to achieve a trade-
off between relevance on one hand and objectivity and feasibility on the other hand.

Some argue that having various organizations establish accounting principles is wasteful and
inefficient.

Rather than mandating accounting rules, each company could voluntarily disclose the type of
information it considered important.
In addition, if an investor wants additional information, the investor could contact the company
and pay to receive the additional information desired.

The GAAP consists of several assumptions, principles and constraints that explain how
companies should recognize, measure, and report financial elements and events.

These are globally accepted concepts or rules for recognition, measurement, treatment and
presentation of financial status of business enterprises.

Basic Concepts / Assumptions of Accounting

The basic concepts/assumptions are like the pillars on which the structure of accounting is based.

The four basic concepts/assumptions of Accounting are as under;

1. Business Entity Assumption: According to this assumption, the business is treated as a

unit or entity apart from its owners, creditors, managers and [Link] recording the
transactions, it is the business which is the entity and with which we are concerned.
2. Money Measurement Assumption: The money measurement assumption underlines the
fact that in accounting every worth-recording event, happening or transaction is recorded
in terms of money.
3. Going Concern Assumption: Also known as ‘continuity assumption’, the enterprise is
normally viewed as a going concern, i.e. continuing in operation for the foreseeable
future.
4. Accounting Period Assumption: The economic activities of a company can be divided
into artificial time [Link] to this assumption, the economic life of an
enterprise is artificially split into periodic intervals, which are known as accounting
periods, at the end of which an income statement and financial position statement are
prepared to show the performance and financial position, the use of this assumption
further requires the allocation of expenses between capital and revenue.

Basic Principles of Accounting

Basic principles of Accounting are essential and these are the general decision making rules
which govern the development of accounting techniques.

These principles guide how transactions should, be recorded and reported.

On the basis of the four basic assumptions of accounting, the following basic principles of
accounting have been developed:

1. Revenue Recognition Principle: A crucial question for many companies is when to

recognize revenue. Revenue recognition generally occurs (1) when realized or realizable
and (2) when earned. This approach has often been referred to as the revenue recognition
principle.
 2. Historical Cost Principle: According to this principle, an asset is ordinarily recorded in
the accounting records at the price paid to acquire it at the time of its acquisition and the
cost becomes the basis for the accounts during the period of acquisition and subsequent
accounting periods.
3. Matching Principle: According to this principle, the expenses incurred in an accounting
period should be matched with the revenues recognized in that period.
4. Full Disclosure Principle: According to this principle, the financial statements should
act as means of conveying and not concealing.
5. Objectivity Principle: According to this principle, the accounting data should be
definite, verifiable and free from personal bias of the accountant.

Constraints of Accounting
Constraints are actually the limit or boundaries that are necessary for providing information with
the qualitative in characteristics.

To make the information useful, the basic assumptions and principles discussed earlier’, have to
be modified.

These modifying principles are as under:

1. Cost-Benefit Relationship: The cost of applying an accounting principle should not be

more than its benefits. If the cost is more, this principle should be modified.
2. Materiality: This constraint is basically an exception to the full disclosure principle. It
requires that the items or events having an insignificant economic effect or not being
relevant to the user’s need not be disclosed.
3. Consistency: It states that, whatever accounting practices (whether logical or not) are
selected for a given category of transactions, they should be followed on a horizontal,
basis from one accounting period to another to achieve compatibility,
4. Conservatism: Conservatism means when in doubt choose the solution that will be least
likely to overstate assets and income.
5. Timeliness: According to this constraints, timely information (though less reliable)
should be made available to the decision makers.
6. Industry Practice: The peculiar characteristics of an industry may require departure
from the accounting assumptions, principles and constraints discussed above.

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Basic Accounting: The Accounting Cycle Explained

BY Meghan Fleury In Outsourced Accounting Services On Feb 24, 2015 With 3 Comments

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 inShare13
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We've created this Basic Accounting series to help you understand the fundamentals of accounting.
Whether you handle the accounting yourself or have delegated it to an in-house or outsourced
accountant, you'll find these posts useful as you review the financial health of your company.

Keeping accurate financial documents is not an option. It's mandatory by the IRS. The
accounting cycle is the system in which businesses record their transactions in order to prepare
required financial statements. However, many business owners don’t understand this process
fully, so we’re breaking it down in today’s post.

WHAT IS THE ACCOUNTING CYCLE?

As previously stated, the accounting cycle is a series of activities that compiles an organization’s
transactions at the end of a reporting period in order to prepare important financial statements.

Since there are quite a few steps involved in the accounting cycle, feel free to print off the
following graphic for your future needs:
Steps of the Accounting Cycle

1. Analyze and measure transactions.

Obviously in this phase, your business collects their transactions for analysis, measurement, and
recording. But here's the first hang-up: what do you have to record?

As a general rule of thumb, a business should minimally record:

1. All cash sales.

2. All purchases (no matter how small).
3. Anything that's measurable, relevant, or reliable.
4. All events:
o External transactions: are between the entity and its environment, such as exchanges
with another company or a change in the cost of goods your business purchases.
o Internal transactions: are exchanges that occur within the organization.

In short, a company records as many transactions as possible that affect its financial position.

If you're looking for more accounting help, try a FREE 30 minute session with one of our
accountants.

2. Record transactions in the journal.

This is also known as journalizing. A journal chronologically lists transactions and other events
in terms of debits and credits to accounts. Each journal entry consists of four parts:

1. The accounts and amounts to be debited.

2. The accounts and amounts to be credited.
3. The date of transaction.
4. A transaction explanation.

3. Post information from the journal to the ledger.

This is the act of transferring information from the journal to the ledger. Posting is needed in
order to have a complete record of all accounting transactions in the general ledger, which is
used to create a company's financial statements.

4. Prepare an unadjusted trial balance.

The unadjusted trial balance is a list of the accounts and their balances at a given time, before
any adjusting entries are made to create financial statements. The accounts are listed in the order
which they appear in the ledger, with debit balances listed in the left column and credit balances
in the right column. The totals of these two columns must match.
 5. Preparing adjusting entries.

Adjusting entries are journal entries recorded at the end of an accounting period that alter the
final balances of various general ledger accounts. These adjustments are made in order to more
closely align the reported results and the actual financial position of a business. Adjusting entries
follow the principles of revenue recognition and matching.

6. Prepare an adjusted trial balance.

After journalizing and posting all adjusting entries, many businesses prepare another trial
balance from their ledger and accounts. This is called the adjusted trial balance. It shows the
balance of all accounts, including those adjusted, at the end of the accounting period. Therefore,
the end result of this adjusted trial balance demonstrates the effects of all financial events that
occurred during that particular reporting period.

7. Prepare financial statements.

Financial statements can be prepared directly from the adjusted trial balance. A financial
statement is an organization's financial results, condition, and cash flow.

8. Prepare closing entries.

In the closing phase, temporary balances are reduced to zero in order to prepare the accounts for
the next period's transactions. This process empties the entity's temporary accounts and deposits
anything remaining into a permanent account.

9. Prepare a post-closing trial balance.

The post-closing balance consists only of assets, liabilities, and owners' equity, also known as
real or permanent accounts. This balance provides evidence that the company has properly
journalized and accurately posted the closing entries.

Now that your company has performed a complete accounting cycle, it's ready for the next
reporting period.

Other basic accounting posts you may find helpful:

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The post-closing trial balance

September 06, 2017

A post-closing trial balance is a listing of all balance sheet accounts containing non-zero
balances at the end of a reporting period. The post-closing trial balance is used to verify that the
total of all debit balances equals the total of all credit balances, which should net to zero. The
post-closing trial balance contains no revenue, expense, gain, loss, or summary account balances,
since these temporary accounts have already been closed and their balances moved into the
retained earnings account as part of the closing process.

Once the accountant has ensured that the total of all debits and credits in the report are the same
number, the next step is to set a flag to prevent additional transactions from being recorded in the
old accounting period, and begin recording accounting transactions for the next accounting
period. This is one of the last steps in the period-end closing process.

If any revenue, expense, gain, loss, or summary account balances appear in the trial balance
subsequent to the closing process, it is because they are associated with the next accounting
period.

The post-closing trial balance contains columns for the account number, account description,
debit balance, and credit balance. It will likely not contain "Post Closing Trial Balance" in the
header, since few accounting computer systems use this designation. Instead, it will use the
standard "Trial Balance" report header.

Accounting software requires that all journal entries balance before it allows them to be posted to
the general ledger, so it is essentially impossible to have an unbalanced trial balance. Thus, the
post-closing trial balance is only useful if the accountant is manually preparing accounting
information. For this reason, most procedures for closing the books do not include a step for
printing and reviewing the post-closing trial balance.

Example of a Post-Closing Trial Balance

Note that there are no temporary accounts listed in the following post-closing trial balance:
ABC Company
Trial Balance
June 30, 20XX

Account Account
Number Description Debit Credit

1000 Cash $105,000

1500 Accounts receivable 320,000

2000 Inventory 500,000

3000 Fixed assets 2,000,000

3100 Accumulated depreciation (480,000)

4000 Accounts payable $195,000

4500 Accrued expenses 108,000

5000 Retained earnings 642,000

5500 Common stock 1,500,000

Totals $2,445,000 $2,445,000

What is the Post Closing Trial Balance?

The post closing trial balance is a list of all accounts and their balances after the closing entries
have been journalized and posted to the ledger. In other words, the post closing trial balance is a
list of accounts or permanent accounts that still have balances after the closing entries have been
made.

This accounts list is identical to the accounts presented on the balance sheet. This makes sense
because all of the income statement accounts have been closed and no longer have a current
balance. The purpose of preparing the post closing trial balance is verify that all temporary
accounts have been closed properly and the total debits and credits in the accounting system
equal after the closing entries have been made.
Format
An post closing trial balance is formatted the same as the other trial balances in the accounting
cycle displaying in three columns: a column for account names, debits, and credits.

Since only balance sheet accounts are listed on this trial balance, they are presented in balance
sheet order starting with assets, liabilities, and ending with equity.

As with the unadjusted and adjusted trial balances, both the debit and credit columns are
calculated at the bottom of a trial balance. If these columns aren’t equal, the trial balance was
prepared incorrectly or the closing entries weren’t transferred to the ledger accounts accurately.

As with all financial reports, trial balances are always prepared with a heading. Typically, the
heading consists of three lines containing the company name, name of the trial balance, and date
of the reporting period.

Preparation
Posting accounts to the post closing trial balance follows the exact same procedures as preparing
the other trial balances. Each account balance is transferred from the ledger accounts to the trial
balance. All accounts with debit balances are listed on the left column and all accounts with
credit balances are listed on the right column.

The process is the same as the previous trial balances. Now the ledger accounts just have post
closing entry totals.

Example
After Paul’s Guitar Shop posted its closing journal entries in the previous example, it can prepare
this post closing trial balance.
Notice that this trial balance looks almost exactly like the Paul’s balance sheet except in trial
balance format. This is because only balance sheet accounts are have balances after closing
entries have been made.

Now that the post closing trial balance is prepared and checked for errors, Paul can start
recording any necessary reversing entries before the start of the next accounting period.

Why doesn't the balance sheet equal the post-

closing trial balance?
The totals on the balance sheet will not equal the totals on the post-closing trial balance due to
contra accounts. We will use the contra account Accumulated Depreciation to illustrate why this
occurs.

The account Accumulated Depreciation will have a credit balance and it will be listed in the
credit column of the trial balance. Its credit balance will be included with the other credit
balances, most of which are liability accounts and owner or stockholder equity accounts.

On the balance sheet, the credit balance in Accumulated Depreciation will not be reported with
the other credit balances. Rather, the credit balance in Accumulated Depreciation will be a
deduction from the debit balances reported in the asset section entitled property, plant and
equipment.

What is the procedure for preparing a trial

balance?
To prepare a trial balance, you or the accounting software will simply list the titles of all of the
accounts in the general ledger that have balances. To the right of the account titles you will have
two columns for entering each account's balance. One column is headed "Debit" and the other
column is headed "Credit." You then list each account's balance in the appropriate column. After
all of the account balances are entered, each column is summed. The total of the debit column
should be equal to the total of the credit column.

Prior to accounting software, there were many opportunities for errors. For example, an amount
might be written incorrectly when posted from a journal to the account, a math error might occur
when calculating an account's balance, an amount might be written incorrectly in one of the
columns on the trial balance, and so on. The trial balance alerted you that an amount or amounts
were wrong. If the trial balance did not balance, it meant rechecking all of the amounts.

Today, the accounting software has eliminated the math and clerical errors. As a result, the trial
balance does not play the critical role that it did many years ago.
Post-Closing Trial Balance
A post-closing trial balance is a list of balances of ledger accounts prepared after closing entries
have been passed and posted to the ledger accounts. Since the closing entries transfer the
balances of temporary accounts (i.e. expense, revenue, gain, dividend and withdrawal accounts)
to the retained earnings account, the new balances of temporary accounts are zero and therefore
they are not listed on a post-closing trial balance. However, all the other accounts having non-
negative balances are listed including the retained earnings account.

The preparation of post-closing trial balance is the last step of the accounting cycle and its
purpose is to be sure that sum of debits equal the sum of credits before the start of new
accounting period. It provides the openings balances for the ledger accounts of the new
accounting period.

Example
The following post-closing trial balance was prepared after posting the closing entries of
Company A to its general ledger and calculating new account balances:

Company A

Adjusted Trial Balance

January 31, 2010

Debit Credit

Cash $20,430 −

Accounts Receivable 5,900 −

Office Supplies 4,320 −

Prepaid Rent 24,000 −

Equipment 80,000 −

Accumulated Depreciation − $1,100

Accounts Payable − 5,200

Utilities Payable − 3,964

Unearned Revenue − 1,000

Interest Payable − 150

Notes Payable − 20,000

Common Stock − 100,000

Retained Earnings − 3,236

Total $134,650 $134,650

This is the end of the accounting cycle. In the next accounting period, the accounting cycle will
be repeated again starting from the preparation of journal entries i.e. the first step of accounting
cycle.

What is a Reversing Entry?

Reversing entries, or reversing journal entries, are journal entries made at the beginning of an
accounting period to reverse or cancel out adjusting journal entries made at the end of the
previous accounting period. This is the last step in the accounting cycle.

Reversing entries are made because previous year accruals and prepayments will be paid off or
used during the new year and no longer need to be recorded as liabilities and assets. These
entries are optional depending on whether or not there are adjusting journal entries that need to
be reversed.

Why are Reversal Entries Used?

Reversing entries are usually made to simplify bookkeeping in the new year. For example, if an
accrued expense was recorded in the previous year, the bookkeeper or accountant can reverse
this entry and account for the expense in the new year when it is paid. The reversing entry erases
the prior year’s accrual and the bookkeeper doesn’t have to worry about it.

If the bookkeeper doesn’t reverse this accrual enter, he must remember the amount of expense
that was previously recorded in the prior year’s adjusting entry and only account for the new
portion of the expenses incurred. He can’t record the entire expense when it is paid because some
of it was already recorded. He would be double counting the expense.

Example
It might be helpful to look at the accounting for both situations to see how difficult bookkeeping
can be without recording the reversing entries. Let’s look at let’s go back to your accounting
cycle example of Paul’s Guitar Shop.

In December, Paul accrued $250 of wages payable for the half of his employee’s pay period that
was in December but wasn’t paid until January. This end of the year adjusting journal entry
looked like this:

Accounting with the reversing entry:

Paul can reverse this wages accrual entry by debiting the wages payable account and crediting
the wages expense account. This effectively cancels out the previous entry.

But wait, didn’t we zero out the wages expense account in last year’s closing entries? Yes, we
did. This reversing entry actually puts a negative balance in the expense. You’ll see why in a
second.

On January 7th, Paul pays his employee $500 for the two week pay period. Paul can then record
the payment by debiting the wages expense account for $500 and crediting the cash account for
the same amount.

Since the expense account had a negative balance of $250 in it from our reversing entry, the
$500 payment entry will bring the balance up to positive $250– in other words, the half of the
wages that were incurred in January.
See how easy that is? Once the reversing entry is made, you can simply record the payment entry
just like any other payment entry.

Accounting without the reversing entry:

If Paul does not reverse last year’s accrual, he must keep track of the adjusting journal entry
when it comes time to make his payments. Since half of the wages were expensed in December,
Paul should only expense half of them in January.

On January 7th, Paul pays his employee $500 for the two week pay period. He would debit
wages expense for $250, debit wages payable for $250, and credit cash for $500.

The net effect of both journal entries have the same overall effect. Cash is decreased by $250.
Wages payable is zeroed out and wages expense is increased by $250. Making the reversing
entry at the beginning of the period just allows the accountant to forget about the adjusting
journal entries made in the prior year and go on accounting for the current year like normal.
As you can see from the T-Accounts above, both accounting method result in the same balances.
The left set of T-Accounts are the accounting entries made with the reversing entry and the right
T-Accounts are the entries made without the reversing entry.

Recording reversing entries is the final step in the accounting cycle. After these entries are made,
the accountant can start the cycle over again with recording journal entries. This cycle repeats in
the exact same format throughout the current year.