Accounting Cycle for a Service Business/Sole Proprietorship

1. Source Documents/Analyzing Transactions into Debit/Credit Parts

Four questions are used in analyzing a transaction into its debit and credit parts:
1. What accounts are affected?
2. How is each account classified?
Asset, liability, owner’s equity, revenue, or expense.
3. How is each account balance changed?
Increased or decreased.
4. How is each amount entered into the accounts?
Debited or credited

Effects:
1. Each transaction changes at least two accounts.
2. When all changes occur on one side of the accounting equation, increases
on that side must be equal to decreases.
3. When a transaction increases one side of the accounting equation, the
other side must be increased by the same amount.
4. When a transaction decreases one side of the accounting equation, the
other side must be decreased by the same amount.

2. Journalize Transactions (Journal)

Date, Account, Source Document, Debit, Credit
Five-column Journal (general & special amount columns – Sales & Cash)
Prove journal, prove cash, rule journal.

3. Post Journal entries (General Ledger)

Date, Post. Ref. (Journal page #), Debit/Credit amount, Balance, Post. Ref. of
Journal (General Ledger account #).
Individual amounts posted separately, special amount column totals posted.

4. Prepare Work Sheet

Reason:
1. Prove debits equals credits (Trial Balance)
2. Bring general ledger accounts up-to-date (Adjustments)
3. Separate accounts according to financial statements to be prepared
(Income Statement & Balance Sheet
4. Calculate Net Income/Loss
Trial Balance, Adjustments, Income Statement, Balance Sheet, Net Income/Loss
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5. Prepare Financial Statements (Income Statement & Balance Sheet)

Income Statement – period of time.
Sections: Heading, Revenue, Expenses, Net Income/Loss, (Component %)
Balance Sheet – specific date
Sections: Heading, Assets, Liabilities, Owner’s Equity
Current Capital = Capital Acct. Bal. + Net Income – Drawing Acct. or
Capital Acct. Bal. + Net Loss – Drawing Acct.

6. Adjusting Entries are Journalized and Posted

Types: 1. To bring Supplies account up to date.
2. To bring Prepaid Insurance account up to date.

7. Closing Entries are Journalized and Posted

Types: 1. Close Income Statement accounts with Credit balance (Revenue).
2. Close Income Statement accounts with Debit balance (Expenses).
3. Record Net Income/Loss and close Income Summary account.
4. Close Drawing account.

8. Prepare Post-closing Trial Balance

Assets, Liabilities, & Owner’s Equity