1. Basic concepts

– Debit = 18 – 0 = 19. The Cost of goods sold total is Credit – Debit = 0 – 9 = -9. The company’s profit is 18 + (-9) = 9.

We have already discussed that the company’s incoming are the liabilities because they should be

returned to the company’s owners. The summarized P&L earning account contains 9 in the Credit part. In Microsoft Dynamics AX, the Credit part always shows negative values. If we look at the second page of the Income statement, we can find that the incoming equal -9.

Accounting Cycle

We already know that some company operations (purchase, sales) should be recorded as transactions (that move amounts from one accounts to others). In this paragraph, we will learn all the steps from the business operation till the financial statement. This flow is called the accounting cycle. This is what an accountant does.

The accounting cycle is the sequence of procedures used to keep track of what has happened in the business and to report the financial effect of those things. The following is a depiction of the steps in the accounting cycle and a brief description of each.

1. Some operation occurs. For example a purchase.

2. Business paper or computer record. Usually, the accounting department is not where the

transaction takes place. It is necessary that a paper or a computer record be prepared at the

point-of-sale so that the accounting department is aware that a transaction occurred (for

different operations different transactions occurred).

3. Analyze. The personnel in accounting analyze the business papers. The goal is to write correct

transactions. It is necessary to determine the following:

o “What happened?” What kind of business took place? Did we charge our customer for

something, get money for something, buy something, etc.?

o “What accounts will change?” Asset, Liability, Owner’s Equity.

o “How will they change?” Will the accounts increase or decrease?

o “Do they get a Debit or Credit?” Debits and Credits were discussed in detail in the

previous paragraph. Debit is “good” for the company, Credit is “bad” for the company.

4. Journalize. The main journal for an accountant is the General Journal. General Journal is used

to write transactions to it. In this step, the accountant writes transactions to the General Journal.

5. Post. Post the journal (or posting) is the act of transferring the information in the journal to the

appropriate accounts. In the previous step, the Accountant wrote the transactions in the journal, and in this step, the transactions are posted – amounts are transferred from one account to

another.

6. Trial Balance. A trail balance is a list of all accounts and their balances. It is a written view of

the financial circle. The accountant checks the accounting equation: Assets = Liabilities +

Owner’s Equity.

7. Adjustments. Generally speaking, adjusting entries are made at the end of a period to ensure

that Revenues are reported when earned and Expenses are reported when incurred. We will

study this step in detail in the future lesson.

8. Adjusted Trail Balance. The accountant checks the accounting equation after adjustments.