The Accounting Process

(The Accounting Cycle)

The Accounting Process is a series of activities that begins with a transaction and ends with the closing of the books. Because this process is repeated each reporting period, it is referred to as the accounting cycle and includes these major steps:

1. Identify the transaction or other recognizable event.

2. Prepare the transaction’s source document such as purchase order or invoice.

The source document is the original record of a transaction. During an audit, source documents are used as evidence that a particular business transaction occurred. Example of source documents include:

· Cash receipts

· Credit card receipts

· Cash register tapes

· Cancelled checks

· Customer invoices

· Supplier invoices

· Purchase orders

· Time cards

· Deposit slips

· Notes for loans

· Payment stubs for interest

At a minimum, each source document should include the date, the amount, and a description of the transaction. When practical, beyond these minimum requirements source documents should contain the name and address of the order party of the transaction.

When a source document does not exist, for example, when a cash receipt is not provided by a vendor or is misplaced, a document should be generated as soon as possible after the transaction, using other documents such as bank statements to support the information on the generated source document.

Once a transaction has been journalized, the source document should be filed and make retrievable so that transactions can be verified should the need arise at a later date.

3. Analyze and classify the transaction. This step involves quantifying the transaction in monetary terms (e.g. dollars and cents), identifying the accounts that are affected and whether those accounts are to be debited or credited.

4. Record the transaction by making entries in the appropriate journal, such as the sales journal, purchase journal, cash receipt or disbursement journal, or the general journal. Such entries are made in chronological order.

The journal is the point of entry of business transactions into the accounting system. It is a chronological record of the transactions, showing an explanation of each transaction, the accounts affected, whether those accounts are increased or decreased, and by what amount.

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A security is an instrument that represents ownership in an asset or debt obligation.

Securities are classified as either money market securities, capital market securities, or derivative securities.

Money market securities are short-term indebtedness. By " short term" we usually imply an original maturity of one year or less. The most common money market securities are Treasury bills, commercial paper, negotiable certificates of deposit, and bankers acceptances.

Treasury bills (T-bills) are short-term securities issued by the U.S. government; they have original maturities of either four weeks, three months, or six months. Unlike other money market securities, T-bills carry no stated interest rate. Instead, they are sold on a discounted basis: Investors obtain a return on their investment by buying these securities for less than their face value and then receiving the face value at maturity. T-bills are sold in $10, 000 denominations; that is, the T-bill has a face value of $10, 000.

Commercial paper is a promissory note-a written promise to pay-issued by a large, creditworthy corporation. These securities have original maturities ranging from one day to 270 days and usually trade in units of $100, 000. Most commercial paper is backed by bank lines of credit, which means that a bank is standing by ready to pay the obligation if the issuer is unable to. Commercial paper may be either interest - bearing or sold on a discounted basis.

Certificates of deposit (CDs) are written promises by a bank to pay a depositor.

Nowadays they have original maturities from six months to three years. Negotiable certificates of deposit are CDs issued by large commercial banks that can be bought and sold among investors. Negotiable CDs typically have original maturities between one month and one year and are sold in denominations of $100, 000 or more. Negotiable certificates of deposit are sold to investors at their face value and care a fixed interest rate. On the maturity date the investor is repaid the amount borrowed plus interest.

Eurodollar certificates of deposit a CDs issued by foreign branches of U.S. banks and Yankee certificates of deposit are CDs issued by foreign bank located in the United Stats. Both Eurodollar CDs and Yankee CDs are denominated in U.S. dollars. In other words, interest payments and the repayment of principal are both in U.S. dollars.

Bankers’ acceptances are short-term loans usually to importers and exporters made by bank to finance specific transactions. An acceptance is created when a draft (a promise to pay) is written by a bank’s customer and the bank “ accept” it promising to pay/ The bank’s acceptance of the draft is a promise to pay the face amount of the draft to whoever present it for payment. The bank’s customer then uses the draft to finance a transaction giving this draft to her supplier in exchange for goods. Typically bankers acceptance have maturities of less than 180 days. Bankers acceptances are sold at a discount from their face value and the face value is paid at maturity. Since acceptances are backed by both the issuing bank and the purchaser of goods the likelihood of default is very small.

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ВАРІАНТ I