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CH 7] Business 101 7-5

Figure 7.2 The Accounting Cycle

Basic Accounting Data

Transactions generate
Invoices, receipts, and other source documents related to each
transaction are assembled to justify making an entry in the
firm's accounting records.

Processing Accounting Data

Recording Transactions
Transactions are recorded from source documents in their
chronological order in the firms books called journals. Brief
explanations are given for each entry.

Posting transactions to classifying accounts
Journal entries are transferred or posted to individual accounts
kept in a ledger. All entries involving cash are brought together in
the ledger's cash account; all entries involving sales are recorded
in the ledger's sales account.

Summarize Accounts
At the end of the accounting period all accounts in the ledger are
summarized and then financial statements are prepared from
these account summaries.

Financial Statements are prepared

Balance Sheet Income Statement Statement of Cash Flows

Private accountants may specialize in different aspects of accounting, and carry
various titles such as cost accountant, internal auditor, or tax accountant. A cost 7
accountant devises the cost of goods and services and helps establish a firms prices. A
tax accountant will track the tax laws to minimize taxes owed and paid, and is thus in
charge of the firm's federal and state tax returns. The corporate internal auditor
examines the firm's financial practices to ensure that records are accurate and that “I have never understood
company operations are in compliance with federal and state regulations. why it is ‘greed’ to want to
keep the money you have
The Accounting Cycle earned but not greed to
Accounting’s purpose is to accurately record the transactions of a firm and want to take somebody
communicate the results of those business transactions. Business transactions can be else’s money.” --Thomas
between the firm and its customers, suppliers, owners, bankers, various government Sowell
agencies, and its own employees. Payroll checks result in cash outflows for the
compensation of employees; a payment to a supplier results in the receipt of needed
materials for the production process; customer purchases generate revenues to cover
the cost of operations and earn a profit. The accounting cycle is the sequence of steps accounting cycle
used to keep track of what has happened in the business and report the financial effect The steps of recording,
of those transactions. As Figure 7.2 indicates, business activity and transactions posting, and preparing
generate source documents from which accounting information is recorded, classified, reports that are the results
and summarized with the final goal of producing financial statements for management, of business transactions.

investors and lenders, and meeting tax obligations.

Learning to Do, Doing to Learn, Earning to Live, Living to Serve
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