This lesson examines the underlying accounting process that transforms business transactions into financial statements, including the double-entry system and the accounting cycle.

2.1 The Accounting Equation and the Double-Entry System

The accounting equation is the foundation of financial reporting:

Assets = Liabilities + Equity

This equation must always balance. The double-entry system ensures that every transaction affects at least two accounts, maintaining this balance . Debits and credits are used to record increases and decreases in accounts, following the rules of double-entry bookkeeping. Students learn the process and mechanism of accounting, which is central to preparing financial statements .

2.2 The Accounting Cycle

The accounting cycle is the step-by-step process of recording, classifying, and summarising financial transactions. Key steps include:

• Journal Entries: Recording transactions in chronological order.

• Posting to the Ledger: Transferring journal entries to individual accounts.

• Trial Balance: A listing of all accounts and their balances to ensure debits equal credits .

• Adjusting Entries: Recording accruals, deferrals, and other adjustments.

• Financial Statement Preparation: Preparing the income statement, balance sheet, and cash flow statement .

2.3 Financial Statements as the Output

The final output of the accounting process is the set of financial statements. These provide a structured representation of the financial position and performance of the entity . The University of Jyväskylä course notes that financial statements, including cash flows, management reports, and sustainability disclosure, form the basis for financial analysis .