The Accounting Cycle & Key Concepts
The accounting cycle follows nine key steps that businesses use to track their finances: 1) analyze transactions, 2) record in journal, 3) post to ledger, 4) prepare unadjusted trial balance, 5) prepare adjusting entries, 6) prepare adjusted trial balance, 7) prepare financial statements, 8) prepare closing entries, and 9) create post-closing trial balance.
The fundamental accounting equation states that Assets = Liabilities + Equity. This equation can be rearranged to find any component: Assets - Liabilities = Equity or Liabilities = Assets - Equity. When recording transactions, remember DEALER: Debits increase Dividends, Expenses, and Assets while Credits increase Liabilities, Equity, and Revenue.
Two main accounting methods exist: cash basis (recording revenue when cash is received and expenses when cash is paid) and accrual basis (recording revenue when earned and expenses when incurred). Most businesses use accrual accounting because it gives a more accurate picture of financial performance.
💡 Real-World Connection: The W2 form your employer shares summarizes your yearly earnings and tax payments, while the W4 form you complete when starting a job helps determine tax withholding from your paycheck.
Financial statements tell different stories about a business: the balance sheet shows wealth at a specific date, the income statement summarizes revenue and expenses over time, the cash flow statement tracks money movement, and the statement of owners equity shows changes in shareholders' investment.
