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 kobe shoes
7:12 PM on September 7, 2020 
Youre so cool! I dont suppose Ive learn anything like this before. So good to seek out anyone with some unique thoughts on this subject. realy thanks for beginning this up. this website is something that is needed on the web, someone with a bit of originality. useful job for bringing something new to the internet!
kobe shoes http://www.kobe-shoes.us.com
Reply supreme clothing
7:13 PM on September 7, 2020 
This really answered my problem, thanks!
supreme clothing http://www.supremeclothing.us.org
Reply kd shoes
10:44 PM on September 7, 2020 
Oh my goodness! an amazing article dude. Thank you Nevertheless I am experiencing situation with ur rss . Don?t know why Unable to subscribe to it. Is there anybody getting identical rss drawback? Anyone who knows kindly respond. Thnkx
kd shoes http://www.kd13shoes.us
Reply golden goose shoes
9:23 PM on September 8, 2020 
I'm often to running a blog and i actually respect your content. The article has really peaks my interest. I'm going to bookmark your site and maintain checking for brand spanking new information.
golden goose shoes http://www.goldengooseoutlets.us
Reply nike epic react flyknit
10:26 PM on September 8, 2020 
There are some interesting closing dates in this article but I don?t know if I see all of them center to heart. There is some validity but I will take maintain opinion until I look into it further. Good article , thanks and we would like more! Added to FeedBurner as effectively
nike epic react flyknit http://www.nikereact.org
Reply jordan shoes
1:01 AM on September 9, 2020 
After study just a few of the blog posts in your web site now, and I truly like your method of blogging. I bookmarked it to my bookmark website record and can be checking again soon. Pls try my web page as effectively and let me know what you think.
jordan shoes http://www.jordanshoes.us
Reply curry 6
6:59 PM on September 9, 2020 
Hiya! I just want to give an enormous thumbs up for the good info you've gotten here on this post. I will likely be coming back to your weblog for extra soon.
curry 6 http://www.curry6.net
Reply hermes handbags
7:01 PM on September 9, 2020 
When I initially commented I clicked the -Notify me when new comments are added- checkbox and now each time a remark is added I get 4 emails with the same comment. Is there any way you possibly can take away me from that service? Thanks!
hermes handbags http://www.hermes-handbags.us.org
Reply cheap jordans
8:04 PM on September 9, 2020 
Aw, this was a really nice post. In thought I wish to put in writing like this moreover ?taking time and actual effort to make a very good article?but what can I say?I procrastinate alot and under no circumstances appear to get one thing done.
cheap jordans http://www.jordans.com.co
Reply adidas yeezy
10:11 PM on September 9, 2020 
There are some interesting time limits on this article however I don?t know if I see all of them center to heart. There's some validity but I'll take maintain opinion until I look into it further. Good article , thanks and we wish more! Added to FeedBurner as nicely
adidas yeezy http://www.yeezy-shoes.us.org
Reply moncler
9:27 PM on September 10, 2020 
When I initially commented I clicked the -Notify me when new feedback are added- checkbox and now each time a comment is added I get four emails with the same comment. Is there any method you may remove me from that service? Thanks!
moncler http://www.monclerjackets.us.org
Reply kd shoes
10:56 PM on September 10, 2020 
Spot on with this write-up, I truly think this web site needs rather more consideration. I?ll most likely be again to learn far more, thanks for that info.
kd shoes http://www.kd11.us
Reply jordan shoes
2:31 AM on September 11, 2020 
Oh my goodness! an amazing article dude. Thank you Nevertheless I'm experiencing concern with ur rss . Don?t know why Unable to subscribe to it. Is there anybody getting an identical rss drawback? Anyone who knows kindly respond. Thnkx
jordan shoes http://www.jordan13.us.com
Reply kyrie 5
8:22 PM on September 11, 2020 
Youre so cool! I dont suppose Ive learn something like this before. So good to find any person with some original thoughts on this subject. realy thanks for beginning this up. this website is one thing that is needed on the web, somebody with a bit originality. helpful job for bringing something new to the internet!
kyrie 5 http://www.kyrieirvingshoes.us.com
Reply yeezy
8:23 PM on September 11, 2020 
I discovered your blog website on google and test a number of of your early posts. Continue to keep up the very good operate. I just extra up your RSS feed to my MSN Information Reader. In search of ahead to studying extra from you in a while!?
yeezy http://www.adidasyeezyshoes.com
Reply lebron shoes
10:16 PM on September 11, 2020 
When I originally commented I clicked the -Notify me when new comments are added- checkbox and now every time a remark is added I get four emails with the same comment. Is there any way you possibly can remove me from that service? Thanks!
lebron shoes http://www.lebronjames.us.com
Reply yeezy
4:23 AM on September 12, 2020 
I am typically to running a blog and i really appreciate your content. The article has actually peaks my interest. I'm going to bookmark your website and maintain checking for new information.
yeezy http://www.adidasyeezyshoes.com
Reply lebron 15
1:31 PM on September 13, 2020 
There are some attention-grabbing cut-off dates on this article however I don?t know if I see all of them middle to heart. There may be some validity however I will take maintain opinion until I look into it further. Good article , thanks and we wish more! Added to FeedBurner as properly
lebron 15 http://www.lebron15.net
Reply jordan 13
2:24 PM on September 13, 2020 
You made some first rate factors there. I looked on the web for the problem and found most people will go together with together with your website.
jordan 13 http://www.jordan13.us.com
Reply golden goose sneakers
12:33 PM on September 14, 2020 
I discovered your weblog web site on google and test just a few of your early posts. Proceed to maintain up the very good operate. I simply extra up your RSS feed to my MSN News Reader. Looking for forward to reading more from you in a while!?
golden goose sneakers http://www.goldengoosesonline.com