Business Ethics

When does the accounting cycle begin?

When a transaction occurs such as a sale or investment

What document type is used to record transactions in the accounting cycle?

Entries supported by receipts or sales invoices

What statement ensures total debits equal total credits?

The balance sheet

Why is the accounting cycle described as continual?

Because it runs throughout the business operating cycle and repeats with each transaction

What is meant by the “natural period of time” in the accounting cycle?

The cutoff interval used to group transactions usually one year or sometimes monthly

You buy office supplies for $50 cash. How does this fit into the accounting cycle?

It is a transaction that must be recorded in entries showing decreased cash and increased expense

A customer pays you $100 for services. Where does this get reflected in the cycle?

In an entry then summarized in financial statements which affect net income

What are the three key components when recording a transaction in the accounting cycle?

Entries receipts and sales

How do revenues and expenses connect to net income in the cycle?

Revenues and expenses are closed at the end of the period and their difference becomes net income transferred to equity

Why is the balance sheet considered a “necessary” step in the cycle?

Because it validates accuracy by showing debits equal credits and provides a snapshot of financial position

If a business skipped closing revenues and expenses at period end what problems might occur?

Net income would be misstated equity would be inaccurate and future decisions would be based on faulty records

Design a mini accounting cycle example for a lemonade stand. Include at least one sale one expense and show how net income appears.

Example sale $20 record revenue supplies $5 record expense close accounts net income $15