100%(1)1 out of 1 people found this document helpful
This preview shows page 4 - 6 out of 28 pages.
Generally Accepted Accounting Principles (GAAP)Before you can visualize the eight steps in the accounting cycle, you must be able torecognize a business transaction. Business transactions are measurable events that affect thefinancial condition of a business. For example, assume that the owner of a business spilled apot of coffee in her office or broke her leg while skiing. These two events may brieflyinterrupt the operation of the business. However, they are not measurable in terms that affectthe solvency and profitability of the business. Business transactions can be the exchange ofgoods for cash between the business and an external party, such as the sale of a book, or they
Accounting Cyclecan involve paying salaries to employees. These events have one fundamental criterion: Theymust have caused a measurable change in the amounts in the accounting equation, Assets = Liabilities + Stockholders' Equity.The evidence that a business event has occurred is a source document such as a sales ticket,check, and so on. Source documents are important because they are the ultimate proof ofbusiness transactions. After you have determined that an event is a measurable businesstransaction and has adequate proof of this transaction, mentally analyze the transaction'seffects on the accounting equation. Accounting cycle is the financial process starting withrecording business transactions and leading up to the preparation of financial statements. Thisprocess demonstrates the purpose of financial accounting--to create useful financialinformation in the form of general-purpose financial statements. In other words, the solepurpose of recording transactions and keeping track of expenses and revenues is turn this datainto meaning financial information by presenting it in the form of a balance sheet, incomestatement, statement of owner's equity, and statement of cash flows.The accounting cycle is a set of steps that are repeated in the same order every period. Theculmination of these steps is the preparation of financial statements. Some companies preparefinancial statements on a quarterly basis whereas other companies prepare them annually.This means that quarterly companies complete one entire accounting cycle every threemonths while annual companies only complete one accounting cycle per year.Accounting Cycle StepsThis cycle starts with a business event. Bookkeepers analyze the transaction and record it inthe general journal with a journal entry. The debits and credits from the journal are thenposted to the general ledger where an unadjusted trial balance can be prepared.After accountants and management analyze the balances on the unadjusted trial balance, theycan then make end of period adjustments like depreciation expense and expense accruals.