🎮 Interactive Learning: The Accounting Cycle
1. Accounting Cycle Flowchart
Click each step to see detailed explanations and examples. Complete the entire accounting cycle!
Analyze Transactions
Identify how transactions affect the accounting equation
Example:
Company purchased equipment for $5,000, paid in cash.
Analysis:
- Assets: Equipment increases by $5,000
- Assets: Cash decreases by $5,000
- Total assets remain unchanged; the accounting equation stays balanced
Record Journal Entries
Record all transactions chronologically in the journal
Format:
| Account | Debit | Credit |
|---|---|---|
| Equipment | 5,000 | |
| Cash | 5,000 |
Post to Ledger
Transfer journal entries to individual ledger accounts
Process:
- Record debit amounts to the debit side of corresponding accounts
- Record credit amounts to the credit side of corresponding accounts
- Maintain original transaction date and reference number
Purpose: Organize transaction information by account type for easier access and analysis
Prepare Unadjusted Trial Balance
Verify that total debits equal total credits
Purpose:
- Ensure all journal entries maintain the debit-credit equality
- Check for mathematical errors
- Identify any omitted entries
Note: A trial balance cannot detect all errors (e.g., errors of principle, omitted transactions)
Prepare Adjusting Entries
Update accounts to properly reflect accruals and deferrals
Common Adjustments:
- Accrued revenues and expenses
- Prepaid expense amortization
- Depreciation expense
- Allowance for doubtful accounts
Example: Monthly depreciation expense of $1,000
Prepare Adjusted Trial Balance
Verify account balances after adjusting entries
Purpose:
- Ensure adjusting entries are properly balanced
- Provide accurate balances for financial statement preparation
Prepare Financial Statements
Generate the Income Statement, Statement of Owner's Equity, and Balance Sheet
Sequence:
- Income Statement: Reports revenues and expenses for the period
- Statement of Owner's Equity: Shows changes in equity during the period
- Balance Sheet: Presents the financial position at period-end
Closing Entries
Transfer temporary account balances to permanent capital accounts
Temporary Accounts (Closed):
- Revenue accounts
- Expense accounts
- Drawing/Dividend accounts
Permanent Accounts (Not Closed): Assets, Liabilities, Owner's Equity
Prepare Post-Closing Trial Balance
Verify the starting point for the next accounting period
Accounts Included:
- Asset accounts
- Liability accounts
- Owner's Equity accounts
Does NOT Contain: Revenue, Expense, and Dividend accounts (these have been closed)
2. Journal Entry Error Spotting Exercise
Find errors in the journal entries below. Click on the highlighted portions to see explanations!
Challenge: Find All Errors!
Errors Found: 0 / 3
Entry 1: Purchasing Office Supplies
Transaction: Company purchased office supplies for $500, paid in cash.
Office Supplies Debit $500
Cash Credit $50
❌ ERROR: Account classification is incorrect.
✓ Correct: Should use "Supplies Expense" account instead of "Office Supplies" asset account.
Reason: Office supplies are typically consumed within the current period and should be recorded as expenses, not assets.
❌ ERROR: Credit amount is incorrect.
✓ Correct: Should be $500, not $50.
Reason: Debits must equal credits. Since the debit is $500, the credit must also be $500.
Entry 2: Receiving Service Fees
Transaction: Company performed services and received $1,000 in cash.
Service Revenue Debit $1,000
Cash Credit $1,000
❌ ERROR: Revenue account is recorded in the wrong direction.
✓ Correct: Should credit "Service Revenue" instead of debiting it.
Rule: Revenue increases with a credit entry. Cash (an asset) increases with a debit entry. The correct entry is: Debit Cash $1,000, Credit Service Revenue $1,000.
Entry 3: Paying Rent
Transaction: Paid monthly rent of $2,000.
Rent Expense Debit $2,000
Rent Expense Credit $2,000
❌ ERROR: Used the wrong credit account.
✓ Correct: Should credit "Cash" instead of "Rent Expense".
Rule: When paying rent, Cash decreases (credit) and Rent Expense increases (debit). The same account cannot be used for both debit and credit in a single entry (with rare exceptions).