Class Notes Chapter 3 The Accounting Cycle: Capturing Economic Events

The accounting cycle

Journalize transactions post entries to the ledger accounts Prepare trial balance make end-
of-year adjustments prepare adjusted balance prepare financial statements Journalize
and post closing entries prepare after-closing trial balance
An account is an individual record showing increases and decreases in the balance. he entire
group of accounts for a particular business is called the ledger.
ransactions are initially recorded in the journal rather than the ledger account. !hen preparing a
journal entry" always list debit accounts and amounts first and show credit accounts and amounts
below the debits" indented slightly.
At the end of the accounting period" transactions are posted from the journal into the ledger
account. Posting is the process of systematically copying information from the journal to the
ledger.
A trial balance lists the balances of all accounts in the ledger. o review" all transactions have an
e#ual debit and credit impact. he total debit balance should be e#ual to the total credit balance
according to the rules of double-entry bookkeeping.
Time period principle$ o provide timely and meaningful information to users of financial
statements" business operations are divided into arbitrary time periods. %inancial statements are
usually prepared monthly.
Revenues represent the price of goods sold or services rendered to customers during any given
accounting period. &evenues increase owners' e#uity.
Expenses are the cost of goods or services used up in the process of earning revenue. Accountants
try to match e(penses incurred with the revenues generated in an accounting period. )(penses
decrease owners' e#uity.
Net income" the e(cess of revenues earned over e(penses incurred" is not an asset. *et income
increases owners' e#uity by increasing retained earnings. !hen a company earns income" assets
+e.g. cash or accounts receivables, must increase or liabilities +unearned revenue, must decrease to
reflect the earnings process.
Realiation Principle$ &evenue should be recognized at the time goods are sold and services are
rendered.
he matching principle states that we must match e(penses with the period in which they are
used.