Chapter 4 - Chapter 4 Review of the Accounting Cycle The...

Chapter 4: Review of the Accounting Cycle
The Accounting Cycle
 The accounting cycle describes the process by which a company records business transactions and
ultimately aggregates and summarizes them in the financial statements.
 The nine steps of the accounting cycle do not depend on the accounting standards being used.
 Whether a company uses U.S. GAAP or IFRS, the accounting cycle begins with analyzing transactions and
ends with a post-closing trial balance.
Analyze the Transaction
 A transaction is an economic event that involves a change in an asset, a liability, or a stockholders’ equity
account that companies record in their accounting records.
 The accounting equation illustrates the relationship among assets, liabilities, and stok holders’ equity as
follows:
Assets = Liabilities + Stockholders’ Equity
The Accounting Equation
 The fact that all transactions affect at least two accounts and that the accounting equation will always
balance is referred to as the double-entry system.
o For example, if an asset increases, then there must either be a decrease in another asset, an
increase in liabilities, or an increase in stockholders’ equity
 Below is the accounting equation expanded to include the components of stockholders’ equity:
 This expanded equation allows companies to analyze complex transactions.
Journalize the Transactions
 After analyzing the transaction, the second step in the accounting cycle is to journalize the transaction by
formally recording the transaction in the accounting system.
 A company records each transaction in specific.
 An account is an individual record of increases and decreases in specific asset, liability, and stockholders
equity items.
Accounts
 A company’s accounting system assigns each account a unique account number shown in the chart of
accounts , a numerical listing of the account names and numbers that assists in locating the account in the
ledger.
 The accounts are typically numbered in balance sheet order: assets, liabilities, equity, and the components
of stockholders’ equity.
Debits and Credits: A Review
 Companies use debits and credits to journalize transactions.

 The terns debit and credit simply mean the left and the right side of an account, respectively; they do not
imply increases or decreases.
 All transactions will result in debits equal to credits
 The normal balance refers to the expected balance in an account, and it is the side that increases the value
of the account.
Journal Entries
 Journalizing a transaction is the process of entering a transaction in the general journal .