CHAPTER 4
Recording Business Transactions (Double-entry
System)
Lesson 4-1 THE ACCOUNTING CYCLE
Lesson Objectives
•define the double-entry system of recording transactions
•familiarize oneself with the accounting cycle
THE DOUBLE-ENTRY SYSTEM OF RECORDING
TRANSACTIONS
Recording transactions in accounting is based on the double-entry [Link]
transactions has a dual effect which means that every transactions affects at least two
[Link] every debit,there is corresponding credit. The total amount of the accounts debited
must equal the total amount of the accounts credited.
The Accounting Cycle
The life of a business is divided into accounting periods of equal length. A standard
sequence of accounting procedures is repeated for each period. These uniform procedures done
to accomplish the accounting process are referred to as the accounting cycle.
1. Identifying and analyzing the events to be recorded
This is the process of identifying and analyzing the transactions to be recorded through
the business documents. Business documents are forms containing evidence to support a
business transaction. These documents provide the data concerning the parties involved in the
transaction, the exchange made, the date, and the money value of the exchange. In determining
the exchange made, the value received by the business and the value parted with are translated
into their debit and credit components.
2. Recording transactions in the journal
This is known as journalizing. It is the process of recording the transaction in the first
book of account known as the journal.
3. Posting journal entries to the ledger
This is known as posting. It is the process of transferring the information found in the
journal into the book of final entry known as the ledger. The ledger summarizes the increases or
decreases of individual accounts.
4. Preparing the trial balance
The trial balance is a list of accounts found in the ledger together with the account's
balance or total. This is a proof that for every debit, there is a corresponding credit. Hence, it is
also a proof that the ledger is in balance.
5. Preparing the worksheet and adjusting entries
The worksheet is a common tool used by accountants to assemble on a sheet of paper
all the information needed to prepare the financial statements, adjusting entries, closing entries,
and the post-closing trial balance.
6. Preparing the financial statements
A statement of financial position, income statement, statement of changes in owner's
equity, and a statement of cash flows are prepared to provide useful information to parties
interested in the financial information of the business.
7. Journalizing and posting of adjusting journal entries
Adjusting entries are prepared at the end of the accounting period to update the
accounts for internal transactions because they affect more than one accounting period. This will
record the accruals, expiration of deferrals, estimation, and other events from the worksheet.
8. Journalizing and posting of closing journal entries
Closing entries are prepared at the end of the accounting period to update the
owner's capital account. This will also eliminate the balances of the nominal accounts so that
they may be ready for the next period.
9. Preparing the post-closing trial balance
After the closing entries have been posted, the post-closing trial balance is prepared
from the general ledger accounts. This is necessary to assure that these entries have been
correctly posted. This will also check the equality of the debits and credits after the closing
entries.
10. Journalizing and posting of reversing journal entries
Reversing entries are prepared to simplify the accounting process. The adjusting
entries are simply reversed on the first day of the accounting period. Not all adjusting entries are
reversed, only accruals and deferrals that use the nominal accounts.
Test Your Understanding
1. Explain the double-entry system of recording.
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2. Discuss the accounting cycle.
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