Page 72 - Accounting Principles (A Business Perspective)

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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 of business transactions. 10
After you have determined that an event is a measurable business transaction and have adequate proof of this

transaction, mentally analyze the transaction's effects on the accounting equation. You learned how to do this in
Chapter 1. This chapter and Chapters 3 and 4 describe the other steps in the accounting cycle. The eight steps in the
accounting cycle and the chapters that discuss them are:
• Analyze transactions by examining source documents (Chapters 1 and 2).
• Journalize transactions in the journal (Chapter 2).
• Post journal entries to the accounts in the ledger (Chapter 2).

• Prepare a trial balance of the accounts (Chapter 2) and complete the work sheet (Chapter 4). (This step
includes adjusting entries from Chapter 3.)
• Prepare financial statements (Chapter 4).
• Journalize and post adjusting entries (Chapters 3 and 4).
• Journalize and post closing entries (Chapter 4).
• Prepare a post-closing trial balance (Chapter 4).
This listing serves as a preview of what you will study in Chapters 2-4. Notice that firms perform the last five
steps at the end of the accounting period. Step 5 precedes steps 6 and 7 because management needs the financial
statements at the earliest possible date. After the statements have been delivered to management, the adjusting and

closing entries can be journalized and posted. In Exhibit 7, we diagram the eight steps in the accounting cycle.
You can perform many of these steps on a computer with an accounting software package. However, you must
understand a manual accounting system and all of the steps in the accounting cycle to understand what the
computer is doing. This understanding removes the mystery of what the computer is doing when it takes in raw
data and produces financial statements.

The journal
In explaining the rules of debit and credit, we recorded transactions directly in the accounts. Each ledger
(general ledger) account shows only the increases and decreases in that account. Thus, all the effects of a single
business transaction would not appear in any one account. For example, the Cash account contains only data on
changes in cash and does not show how the cash was generated or how it was spent. To have a permanent record of
an entire transaction, the accountant uses a book or record known as a journal.

A journal is a chronological (arranged in order of time) record of business transactions. A journal entry is the
recording of a business transaction in the journal. A journal entry shows all the effects of a business transaction as
expressed in debit(s) and credit(s) and may include an explanation of the transaction. A transaction is entered in a
journal before it is entered in ledger accounts. Because each transaction is initially recorded in a journal rather than
directly in the ledger, a journal is called a book of original entry.

10 Many companies send and receive source documents electronically, rather than on paper. In such an electronic
computer environment, source documents might exist only in the computer databases of the two parties

involved in the transaction.

Accounting Principles: A Business Perspective 73 A Global Text