Accounting Lecture 2 — Chapter 3
1. Explain how the double -entry accounting system works, including how it overcomes
the limitations of the temple approach.
-Every transaction must be recorded in a way that affects at least 2 accounts, with the effects
of these entries being equal and offsetting
-The double-entry accounting system enables the use of a huge number of accounts and is
not limited to a ﬁxed number of columns as is the case with the template approach. This
allows the company to capture the information at the level of detail required to manage the
business, yet make it east to summarize the information for reporting purposes.
2. Explain the normal balance concept and how it is used within the double-entry
-The normal balance concept is used to determine whether an account normally has a debit to
-To determine an account’s normal balance, a “T” is drawn through the middle of the
accounting equation. Accounts on the left side of the “T” (assets) normally have a debit (DR)
balance, while accounts on the right side of “T” (liabilities and SE) normally have a credit (CR)
-An accounts normal balance illustrates what needs to be done to increase that account. The
opposite is don't to decrease it
-As retained earnings is a shareholders’ equity account, it normally has a credit balance.
Therefore, to increase it, we would credit it, and to decrease it, we would debit it.
-Following this, revenue accounts, which ultimately increase retained earnings, normally have
a credit balance. Expense and dividends declared accounts, which ultimately decrease
retained earnings, normal have a debit balance.
3. Identify and explain the steps in the accounting cycle.
The steps of the accounting cycle;
1. Start with opening balances
2. Complete transaction analysis
3. Record transactions in the general journal
4. Post transactions to the general ledger
5. Prepare a trail balance
6. Record ad post adjusting entries
7. Prepare an adjusted trial balance
8. Prepare ﬁnancial statements
9. Prepare closing entries
-At a minimum this cycle is repeated annually, but parts of it repeat much more frequently
(quarterly, monthly, weekly or even daily)