Language of Accounting | Financial Statements | Debits & Credits using T Accounts | Major Steps in Accounting Cycle | Review

Accounting, or accountancy, is the measurement, processing and communication of financial information about economic entities. Accounting, which has been called the "language of business", measures the results of an organization's economic activities and conveys this information to a variety of users including investors, creditors, management, and regulators.

Speaking the Language of Accounting

The basic accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities, and owner's equity of a business. It is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits.

Assets = Liabilities + Owner's Equity

Example: A student buys a computer for $945. This student borrows $500 from his parents and spent another $445 earned by his part-time job. Now his assets (computer) are worth $945, liabilities (what he owes his parents) are $500, and the equity is $445.

Assets =Liabilities +Owner's Equity
$945 = $500 +$445

The basic accounting formula must balance at all times.

Financial Statements

Two important documents, or financial statements, in Accounting are the Balance Sheet and the Income Statement. The income statement is a summary of income and expenses during a specific period such as a month, quarter or year. Sometimes it is referred to as a "profit and loss statement." The income statement will show revenue and expenses. Revenue usually comes from the sale of goods or services that are provided. Expenses are the cost of operating a business such as utilities, insurance, and advertising. The balance sheet is a summary of a businessís assets, liabilities, and owner's equity.

Income statement

Assignment: Analyzing a Balance Sheet

Directions: Use the Balance Sheet shown here, to answer the questions in itsLearning.

Balance Sheet

Assignment: Analyzing an Income Statement

Directions: Use the Income Statement shown here, to answer the questions in itsLearning.

Income Statement

Debits & Credits using T Accounts

debit credit ruletA record summarizing all the information pertaining to a single item in the accounting equation is known as an account. Transactions change the balances of accounts in the accounting equation, by increasing or decreasing their value. Accounting transactions must be analyzed, using an accounting device known as a T account, to determine how account balances are changed. There are special names for amounts recorded on the left and right side of a T account. An amount recorded on the left side is called a debit and the amount recorded on the right side is called a credit.

T accounts expandedThe side of the account that is increased in called the normal balance. Assets are increased on the left (debit) and decreased on the right (credit) while liabilities and owner's equity are decreased on the left (debit) and increased on the right (credit).

Let's look at some examples. Every transaction will have a debit and a credit:

debit & credits

debit & credits

debit & credits


Assignment: Analyzing transaction into debit and credit parts

Directions: Download the transaction worksheet from itsLearning. Read the transaction, review the list of accounts, and complete the T-account. For each transaction you will have at least 1 debit and at least 1 credit. A sample has been provided for you. You can type directly on the T-accounts. Submit the completed worksheet to itsLearning.

accounting cycleMajor Steps in Accounting Cycle

The accounting cycle is the collective process of recording and processing the accounting events of a company. Following are the major steps involved in the accounting cycle:

  1. Analyzing and recording transactions via journal entries
  2. Posting journal entries to ledger accounts
  3. Preparing unadjusted trial balance
  4. Preparing adjusting entries at the end of the period
  5. Preparing adjusted trial balance
  6. Preparing financial statements
  7. Closing temporary accounts via closing entries
  8. Preparing post-closing trial balance

accounting cycle presentation
Click on the picture to read the presentation

Assignment: Annual Report Scavenger Hunt

Directions: Locate an annual report for a company of your choice. It can be an actual annual report that your parents have at home (you get them if you are invested with a company) or one that is available on the World Wide Web and answer the questions in itsLearning.



If you are having problems viewing this page, opening videos, or accessing the URLs, the direct links are posted below. All assignments are submitted in itsLearning. If you have having problems, contact Mrs. Rush through the itsLearning email client.

Completion of the Accounting Cycle presentation:

Accounting Vocabulary:

Accounting Review:


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