TLC Bookkeeping Services

Blog

Blog

The Accounting Cycle

Posted on April 1, 2017 at 12:30 AM


Accounting Cycle Steps

1. Identifying and Analyzing Business Transactions

The accounting process starts with identifying and analyzing business transactions and events. Not all transactions and events are entered into the accounting system. Only those that pertain to the business entity are included in the process.

For example, a personal loan made by the owner that does not have anything to do with the business entity is not accounted for.

The transactions identified are then analyzed to determine the accounts affected and the amounts to be recorded.

The first step includes the preparation of business documents, or source documents. A business document serves as basis for recording a transaction.

2. Recording in the Journals

A journal is a book – paper or electronic – in which transactions are recorded. Business transactions are recorded using the double-entry bookkeeping system. They are recorded in journal entries containing at least two accounts (one debited and one credited).

To simplify the recording process, special journals are often used for transactions that recur frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record those that cannot be entered in the special books.

Transactions are recorded in chronological order and as they occur.

Journals are also known as Books of Original Entry.

3. Posting to the Ledger

Also known as Books of Final Entry, the ledger is a collection of accounts that shows the changes made to each account as a result of past transactions, and their current balances.

After the posting all transactions to the ledger, the balances of each account can now be determined.

For example, all journal entry debits and credits made to Cash would be transferred into the Cash account in the ledger. We will be able to calculate the increases and decreases in cash; thus, the ending balance of Cash can be determined.

4. Unadjusted Trial Balance

A trial balance is prepared to test the equality of the debits and credits. All account balances are extracted from the ledger and arranged in one report. Afterwards, all debit balances are added. All credit balances are also added. Total debits should be equal to total credits.

When errors are discovered, correcting entries are made to rectify them or reverse their effect. Take note however that the purpose of a trial balance is only test the equality of total debits and total credits and not to determine the correctness of accounting records.

Some errors could exist even if debits are equal to credits, such as double posting or failure to record a transaction.

5. Adjusting Entries

Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the accounting period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been earned but not entered in the books.

Adjusting entries are prepared to update the accounts before they are summarized in the financial statements.

Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and allowances.

6. Adjusted Trial Balance

An adjusted trial balance may be prepared after adjusting entries are made and before the financial statements are prepared. This is to test if the debits are equal to credits after adjusting entries are made.

7. Financial Statements

When the accounts are already up-to-date and equality between the debits and credits have been tested, the financial statements can now be prepared. The financial statements are the end-products of an accounting system.

A complete set of financial statements is made up of: (1) Statement of Comprehensive Income (Income Statement and Other Comprehensive Income), (2) Statement of Changes in Equity, (3) Statement of Financial Position or Balance Sheet, (4) Statement of Cash Flows, and (5) Notes to Financial Statements.

8. Closing Entries

Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare the system for the next accounting period. Temporary accounts include income, expense, and withdrawal accounts. These items are measured periodically.

The accounts are closed to a summary account (usually, Income Summary) and then closed further to the appropriate capital account. Take note that closing entries are made only for temporary accounts. Real or permanent accounts, i.e. balance sheet accounts, are not closed.

9. Post-Closing Trial Balance

In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to test the equality of debits and credits after closing entries are made. Since temporary accounts are already closed at this point, the post-closing trial balance contains real accounts only.

*10. Reversing Entries: Optional step at the beginning of the new accounting period

Reversing entries are optional. They are prepared at the beginning of the new accounting period to facilitate a smoother and more consistent recording process.

In this step, the adjusting entries made for accrual of income, accrual of expenses, deferrals under the income method, and prepayments under the expense method are simply reversed.

Author's Notes: So there you have the nine steps in the accounting cycle. This is just an overview of the accounting process. Each step will be illustrated one by one in later chapters.

http://www.accountingverse.com/accounting-basics/accounting-cycle.html

Categories: None

Post a Comment

Oops!

Oops, you forgot something.

Oops!

The words you entered did not match the given text. Please try again.

3728 Comments

Reply DavidGenna
10:09 AM on September 28, 2022 
diflucan cream over the counter
Reply TommyemusE
10:37 PM on September 28, 2022 
viagra tablet
Reply AshCok
10:59 PM on September 28, 2022 
buy amoxil online australia price of lyrica in canada buy synthroid cheap buy glucophage online canada trental generic cost
Reply RicDib
12:25 AM on September 29, 2022 
order generic viagra from canada generic cialis uk online pharmacy where can i find viagra how to buy cialis over the counter combivent 4g azithromycin 250mg cost how to safely order viagra online
Reply JaneCok
9:47 AM on September 29, 2022 
cialis from canada no prescription
Reply PaulCok
10:48 AM on September 29, 2022 
tadalafil soft tabs
Reply JackCok
4:54 PM on September 29, 2022 
cialis price europe
Reply Estebannut
8:02 PM on September 29, 2022 
cheapest tadalafil uk
Reply TeoCok
8:18 PM on September 29, 2022 
amoxicillin 875 mg pills
Reply JoeCok
9:36 PM on September 29, 2022 
tadalafil tablets 20 mg canadian cialis order stromectol tablets uk pharmacy home delivery generic cialis no rx viagra over the counter in usa
Reply EvaCok
10:53 PM on September 29, 2022 
price of colchicine in mexico
Reply SueCok
9:59 PM on September 30, 2022 
60 mg generic cialis
Reply SamCok
1:42 AM on October 1, 2022 
sildenafil generic in united states real cialis canada generic viagra online for sale levitra online pharmacy canada buy erectafil
Reply JasonCok
4:16 AM on October 1, 2022 
hydroxychloroquine 1mg
Reply Marvinlub
9:40 AM on October 1, 2022 
biaxin 500 mg tablet
Reply AmyCok
1:25 AM on October 2, 2022 
valtrax on line
Reply TedCok
9:34 AM on October 2, 2022 
where can i buy propecia online
Reply MichaelAided
1:00 PM on October 2, 2022 
how to get cytotec without prescription
Reply TommyemusE
11:02 PM on October 2, 2022 
real viagra online
Reply LisaCok
6:16 AM on October 3, 2022 
can i buy allopurinol over the counter