Increases in expense accounts are debits decreases are credits Increases in

Increases in expense accounts are debits decreases

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Increases in expense accounts are debits; decreases are credits.Increases in Dividends accounts are debits; decreases are credits.In Exhibit 6, we depict these six rules of debit and credit. Note first the treatment ofexpense and Dividends accounts as if they were subclassifications of the debit side of theRetained Earnings account. Second, note the treatment of the revenue accounts as if theywere subclassifications of the credit side of the Retained Earnings account. Next, wediscuss the accounting cycle and indicate where steps in the accounting cycle arediscussed in Chapters 2 through 4.The accounting cycleThe accounting cycleis a series of steps performed during the accounting period(some throughout the period and some at the end) to analyze, record, classify, summarize,and report useful financial information for the purpose of preparing financial statements.Before you can visualize the eight steps in the accounting cycle, you must be able torecognize a business transaction. Business transactionsare measurable events thataffect the financial condition of a business. For example, assume that the owner of abusiness spilled a pot of coffee in her office or broke her leg while skiing. These two events
may briefly interrupt the operation of the business. However, they are not measurable interms that affect the solvency and profitability of the business.Business transactions can be the exchange of goods for cash between the business andan external party, such as the sale of a book, or they can involve paying salaries toemployees. These events have one fundamental criterion: They must have caused ameasurable change in the amounts in the accounting equation, Assets = Liabilities +Stockholders' Equity. The evidence that a business event has occurred is a sourcedocument such as a sales ticket, check, and so on. Source documents are importantbecause they are the ultimate proof of business transactions.7After you have determined that an event is a measurable business transaction and haveadequate proof of this transaction, mentally analyze the transaction's effects on theaccounting equation. You learned how to do this in Chapter 1. This chapter and Chapters 3and 4 describe the other steps in the accounting cycle. The eight steps in the accountingcycle and the chapters that discuss them are:Analyze transactions by examining source documents (Chapters 1 and 2).Journalize transactions in the journal (Chapter 2).Post journal entries to the accounts in the ledger (Chapter 2).Prepare a trial balance of the accounts (Chapter 2) and complete the work sheet(Chapter 4). (This step includes adjusting entries from Chapter 3.)Prepare financial statements (Chapter 4).Journalize and post adjusting entries (Chapters 3 and 4).

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