Discuss the significance of the accounting equation, the rules of debit and credit, and the steps in the accounting cycle

Accounting equation is expressed as Assets equal Liabilities and Equity. Usually, this serves as the basis in preparing journal entries, especially the effects of each accounts in every transaction. This accounting equation is also considered when preparing the balance sheet. Debit and credit does not necessarily mean an increase, a decrease, positive or negative. Debits and credits depicts the balances of each account, depending on the account classification. Normal balances of assets and liabilities and equity have opposite normal balances.

Assets have a normal balance of debit while liabilities and equity have a normal balance of credit. The normal balance of the accounts represents the accounts on which increase in the account in recorded. This means that increase in assets is recorded as debit while a decrease is recorded as credit. On the other hand, increase in liabilities and equity is recorded as credit while decreases are recorded as debit.

Transactions always involve debit and credit accounts. It can be simple or compound entries. A compound entry is prepared when only one debit and one credit is involved in the transaction. On the other hand, compound entry involves more than one account in the debit or more than one accounts in the credit. Whether simple or compound entry, the total balances of debits and credits should always be equal. Transactions that are not classified as financial transaction are not recorded.

In the creation of trial balance, there is a need to initially record all the transactions during the period. These shall be recorded through journal entries. Then, this will be grouped together, summarized and posted in the ledgers. Through the ledgers, the running balances of the accounts are forwarded to the unadjusted trial balance. Then, the adjusting entries are recognized and posted. Once posted, adjusted trial balance and pre-closing entries will be prepared. After it, closing entries will be recorded to transfer the balances of temporary accounts to permanent accounts. When these closing entries are posted, a post-closing trial balance will be prepared.