Chapter 4
The Accounting Cycle: Journals and Ledgers
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In Summary
Distinguish between debits and credits
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Debits are recorded on the left side of an account and credits are recorded on the right side.
For the accounting equation to be correct, the total value of the debits must equal the total
value of the credits.This will ensure that the accounting equation stays in balance.
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Assets, expenses, and owner’s drawings increase with debits and decrease with credits.
Liabilities, revenues, and owner’s capital increase with credits and decrease with debits.
Describe the accounting cycle
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The accounting cycle consists of the steps required to prepare financial statements.The cycle
repeats every period.
Explain how to analyze a transaction
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Analysis of transactions begins with source documents which indicate a transaction has oc-
curred.The analysis helps to determine which accounts are affected, whether they are increas-
ing or decreasing, and whether they are debited or credited.
Record transactions in the general journal
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A journal is a record in which transactions are recorded before they are posted. Journals are
known as books of original entry.
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Double-entry transactions are called journal entries. Every journal entry must have at least
one debit and one credit entry so that the total of the debits equals the total of the credits.
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Journal entries are dated and are listed in chronological order. Accounts which are debited in
a journal entry are listed first, followed by the accounts which are credited (indented). A short
explanation is included for every journal entry.
Post journal entries to the general ledger
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The general ledger is a book used to record all the accounts and balances of the business.
These accounts represent the complete financial position of the business.They also make up
the accounting data from which all reports are generated.
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The listing of all the accounts being used by a business is called a chart of accounts.
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The general ledger is similar to a collection of T-accounts. The debits and credits of each
account are shown along with the current balance of the account.
Prepare a trial balance
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The trial balance lists all accounts in the general ledger and their balances. If the total debits
equals total credits, then the trial balance is balanced.
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If the trial balance is not balanced, an error has occurred and must be fixed before continuing
with the accounting cycle.
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