ACCOUNTING

EQUATION AND
CYCLE
 ACCOUNTING EQUATION
• The accounting equation is a
fundamental principle of
accounting that shows the
relationship between assets,
liabilities, and equity of a
business. The equation is as
follows:
Assets = Liabilities +
Shareholder’s Equity
• This equation indicates that the total assets of a business are always equal to the sum of its
liabilities and equity. In other words, the assets of a business are financed by either its own
resources (equity) or by borrowing (liabilities).
• Assets refer to the economic resources that a business owns or controls and are expected to
provide future benefits to the company. Examples of assets include cash, accounts receivable,
inventory, property, plant, and equipment .
• Liabilities refer to the obligations that a business owes to others and must be repaid in the future.
Examples of liabilities include accounts payable, loans, and notes payable .
• Equity refers to the residual interest in the assets of a business after deducting liabilities. It
represents the owners' claims on the business and includes common stock, retained earnings, and
additional paid-in capital.
 Accounting Cycle
1. Analyzing transactions: This involves
identifying the financial transactions that have
taken place during a period, such as sales,
purchases, payments, and receipts.
2. Journalizing transactions: The next
step involves recording the transactions in the
general journal. The journal is a chronological
record of all the transactions, and each
transaction is recorded using a journal entry.
4. Posting to the general ledger: The transactions recorded in the journal are
then transferred to the general ledger, which is a collection of all the accounts used
by the business. This step involves updating the account balances in the ledger with
the information from the journal.
5. Adjusting entries: At the end of the accounting period, adjusting entries are
made to update the accounts for items such as prepaid expenses, accrued
expenses, and depreciation.
6.Preparing an adjusted trial balance: The adjusted trial balance is prepared
to ensure that the total debits and credits in the general ledger are equal.
7. Preparing financial statements: Based on the adjusted trial balance, the
business prepares financial statements such as the income statement, statement of
retained earnings, and balance sheet.
8.Closing the books: The final step in the accounting cycle involves closing the
temporary accounts, such as revenue and expense accounts, to the retained
earnings account. This prepares the accounts for the next accounting period.