 Hello and welcome to the session in which we will discuss the accounting cycle. What is the accounting cycle or the accounting information system cycle? Well it's very important to remember, to review what is accounting. Simply put, accounting is analyzing financial transaction, recording those financial transactions, processing the transaction, classifying the transaction into various categories, then reporting financial information from this process to interested users, process I mean analyzing, recording, processing and classifying. Simply put the end product is a bunch of financial statements such as income statement, balance sheet, statements of cash flows, so on and so forth. They could also be internal report, but the point is we are giving final product to someone who's interested in this information. Now we're going to go back to accounting 101 and basically look at the accounting cycle and add to it some IT terminology or IT lingo to understand this accounting cycle. How do we start the process? Well we start any accounting process by analyzing transaction from source documents. Now I put source documents in quote because really nowadays you don't have a document, it's basically a computer entry, an email, some sort of an evidence that's why I put source document because back in the old days you would receive some sort of a paper, that's why we called it source document. Simply put let's assume an investor invested $50,000 cash in the business. Well maybe the source document will be a check in an email saying I'm going to invest $50,000, I'm transferring money from my personal account to my bank account, it doesn't really matter. The point is we analyze the transaction by saying cash went up and we issued common stock, that's the transaction, we analyzed it. Now what we do next, we journalize it. In the accounting record we have to journalize things. What does journalizing mean? It means recording it as a form of a debit and credit in the accounting system. Simply put we're going to debit cash $50,000, we're going to credit common stock for $50,000 and this is what we mean by journalizing and you should be very familiar with the process of journalizing as an accounting student, as a CPA candidate, as a CMA candidate, whatever you are studying for. Next what we do is to post journal entries to accounts. Simply put we journalize the transaction, now we need to post each entry to its appropriate account. In the prior entry what we did is we debited cash and we credited common stock. Now what we do, we go to the cash account, we have a cash account 101 and a common stock account number 301 and what we do is we update our cash indicating that we increased our cash, this is a debit column and this is the credit column. We debited cash and we credited common stock. Now we updated the cash account, we updated the common stock and this is the process. Now bear in mind a computerized system will capture all of this and does this all at the same time. What we do then, we determine the account balances and prepare a trial balance. Once we process all the transaction, we looked at their account balances for each account and we prepare a trial balance and this is what a trial balance would look like. Trial balance, we have all the debits with their balances, cash, account receivable, supplies, account payable, service revenue, so on and so forth and they should balance, obviously this is a trial balance and this is what the trial balance would look like. After the trial balance, we journalize and post adjusting entries, basically journalize adjusting entries to make sure all the accounts are up to date. Then after we prepare the adjusting entries, we are ready to have our final product, what we're looking for is the financial statements and various reports, whatever report we are using. Then after we are done with the financial statements, what we do is we journalize and post the closing. Now we say that's it, the period is over, let's close the account that we don't need for next period, not we don't need, we need for next period but we need to start with zero balances and I hopefully you remember those accounts, the temporary account revenues, expenses and dividend and post closing entries and post to the appropriate account, then prepare a post closing. After we close, then we prepare a trial balance with only permanent account. Then the process will start again and this is basically what you have learned in Accounting 101. Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Now from a IT, lingo or accounting information system perspective, in step one we captured the data in step one and step two. So step one, we look at the transaction and we capture the data. Now in the real world, how would you capture this data? You could capture this data manually. I mean it's as simple as writing it on a piece of paper or in the books, in actual accounting books, but these days this information is captured through the accounting information system automatically. Also when we journalize and post, we are also data capturing transaction when we journalize. So notice every time we journalize, it's considered data capture. This is the initial, journalizing is the initial entry, is the initial place where we enter the information. Every time notice we journalize. Then we have steps such as posting, it means transferring the information from the journal to the ledger to the accounts. This is called storage and processing. Here what you're doing is you're taking the information, putting all the cash transaction together, putting all the revenues together, putting all the expenses together. It's called storage and processing step. Also preparing the trial balance, you are storing all the account balances after you have processed the information. Journalizing and posting, also when you post, remember you post here, you post here, it's also part of the storage process because you are updating the account and when you update the account, processing means it's changing the figures, it's processing the information. Then journalizing and posting same thing, it's part of the storage and processing step because it's posting. Again preparing a post closing trial balance, it's a storage of all the permanent accounts. So those are from a lingo perspective, this is the language that we use. Now remain number six, which is the output or the financial reporting process. Then the process will start again and we analyze transaction from source document, journalize, so on and so forth. Now this is one way to look at the accounting cycle. Another way to look at the accounting cycle is to look at the accounting cycle as a set of interrelated cycles or processes or modules, depending what your textbook uses. It could be many, it could have many names. Now for the sake of simplicity and for the sake of education, we're going to break the cycles into basically four cycles with the general and reporting cycle, you can call it also a cycle, to simplify things. Now in the real world, this could be a little bit different. So we're going to have the revenue cycle, the expenditure cycle, production cycle, HR cycle, financing cycle, and the general ledger and reporting cycle. Now we need to know how all these cycles interact with each other because they are all subject to the prior slide where we have journal entries, so on and so forth, but it's very important to see how they all enter relate. Now no company can survive without revenues. So all companies will have a revenue cycle. Now what would they sell? Well, depending on what the company is selling, they could be selling goods, they could be selling services, they could be manufacturing goods, then selling the goods. So notice I also have a production cycle. So some companies may not have a production or manufacturing cycle, the same thing. Why? Because they don't manufacture, like there might be a retailer, they don't manufacture, they just sell the stuff, whatever they buy, they sell, they buy A and they sell A. In a manufacturing process, you buy A, B and C and you sell XYZ, you would sell something else, you manufacture it. Now let's assume we are working with a production cycle, a production company. The first thing is the production cycle will send goods and services, and we're going to see how the production cycle make it later on, sends the production to the revenue cycle for sale. Now the revenue cycle, in the revenue cycle, you sell the goods and services to customers, and as a result, what you do is you bring cash, and that cash is sent to the financing cycle. Then any information captured in the revenue cycle, any data, is also sent to the general ledger. Then what we have is we have the financing cycle. From the financing cycle, we are going to finance our expenditure because no company can operate with only revenues. That will be great, but that's not possible, you need to incur expenditure. In the expenditure cycle, we're going to consume cash that's coming from the financing cycle because we're going to be transaction, we're going to have transaction with suppliers, we're going to have transactions with vendors, we're going to have transaction with people that supply us with goods and services. Here we are basically consuming cash. Then the financing cycle would also send money to the production cycle, because the production cycle needs to hire labor, need to pay for labor, need to pay for material, need to pay for overhead, to come up with the finished goods that we send back to generate revenue. Also, the production cycle gets labor from the HR and payroll cycle. The HR and payroll cycle will not send, basically recruit people, train them, develop them, pay them, and send them to the production cycle. Also, the expenditure cycle would obviously send data, just like the revenue cycle, will send data to the general ledger. Now, notice the production cycle is pretty complex. It gets raw material from the expenditure, it gets financing from the financing cycle, it gets labor from the HR cycle, and it sends goods and services to the revenue. So that's why when we have a specific courses such as managerial accounting and cost accounting, that deals specifically with the production cycle, whether that production cycle is process costing or job order costing. So it's very interesting. That's why it, because it has many, many different cycles related to it. Now, also the production cycle will send the data, the transaction to the general ledger. Now we have the payroll. The payroll gets their money from the financing cycle. And I told you earlier that it sends resources, which is labor, to the production cycle, and it sends data also to the reporting cycle. So notice I have those arrows, those relatively bigger errors, to show you that everyone sends information to the general ledger and reporting cycle. And in the general ledger and reporting cycle, this is where we prepare the financial statements. Now bear in mind, this is a general overview to tell you how these cycles interrelate, just to tell you that it's not as simple as I showed you in Accounting 101, and it's not as simple as what I showed you here. But this is the general idea. And if you look at certain software, for example, I use a software called QuickBooks, certain software, when you look, when you open the software, they show you these cycles separately, your revenue cycle, they have a financing cycle, they have an expenditure cycle, they would have a payroll cycle, and you'd go into that modular into that cycle, and you will work with it. So just, it's literally, that's how it looks like in the real world. Now, bear in mind, I'm going to go through each cycle separately explaining the controls, the risk, how it works, what should you be on the account? Look out for what should you do now? Go to the far hat lectures, do what? Complete MCQs, multiple choice questions, true false questions, whatever resources I have to help you understand this topic better. Good luck, study hard, stay safe, and stay motivated.