CHAPTER 3 REVIEW
Chapter 3 presents a concise yet thorough review of the accounting process. The basic
elements of the accounting process are identified and explained, and the way in which
these elements are combined in completing the accounting cycle is described.
Procedures and the Double-Entry Recording Process
(S.O. 1) The accounting process can be described as a set of procedures used in
identifying, recording, classifying,
information related to the transactions
and other events of a business enterprise. To understand the accounting process, one
must be aware of the basic terminology employed in the process. The basic terminology
events, transactions, real accounts, nominal accounts, ledger, journal,
posting, trial balance, adjusting entries, financial statements,
These terms refer to the various activities that make up the
. As we
review the steps in the accounting cycle, the individual terms will be defined.
refers to the process used in recording transactions.
are used in the accounting process to indicate the effect
a transaction has on account balances. Also, the debit side of any account is the left side;
the right side is the credit side. Assets and expenses are increased by debits and
decreased by credits. Liabilities, owners’ equity, and revenues are decreased by debits
and increased by credits.
*Note: All asterisked (*) items relate to material contained in the Appendices to the chapter.
The Accounting Cycle
In a double-entry system, for every debit there must be a credit and vice-versa. This leads
us, then, to the basic equation in accounting: Assets = Liabilities + Stockholders’ Equity.
(S.O. 3) The first step in the accounting cycle is
analysis of transactions and selected
The purpose of this analysis is to determine which events represent
transactions that should be recorded.
Events can be classified as
. External events are those between the
enterprise and its environment, whereas internal events relate to transactions totally
within the enterprise.