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Chapter 4: Review of the Accounting CycleThe Accounting Cycle The accounting cycle describes the process by which a company records business transactionsand 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 TransactionA 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 equationillustrates 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.oFor 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 accountis 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 ReviewCompanies use debitsand creditsto journalize transactions.
The terns debit and creditsimply 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 balancerefers to the expected balance in an account, and it is the side that increases the value of the account. Journal EntriesJournalizing a transaction is the process of entering a transaction in the general journal.