Accounting cycle refers to steps which recognize, classify, sort, accumulate, analyze, and report the impact of financial transactions in an orderly manner. This cycle is an essential tool in accounting and specifically germane to helping organisations make rational decisions depending on the results of their operations. Here in this guide, each step of the accounting cycle is explained in detail as to what it is, and how it is done. Instead, our purpose and focus is to simplify the explanation for users in the United States while using human-written language suitable for an 8th and 9th-grade reading level.
What is an Accounting Cycle?
The accounting cycle can be described as a number of procedures that an accountant uses to record and process business transactions and then summarize them. The cycle usually starts with the identification of a transaction and ends with the process of preparing for financial statements. It is used in every organization in the world to record transaction because it forms part of financial reporting.
Keywords: accounting cycle, finances, financial records, statements
Recording Transactions
The first process in accounting cycle is journalizing. There are recorded in a journal which is a collection of all the business activities which affect the business financially. Journal are of two types: General journal where all the daily transactions are recorded and second is special journal which records a particular type of transactions, say for instance sales or purchases.
Keywords: transactions, journal, general journal, special journal
Journalizing is another name for posting journal entries to the ledger.
Posting takes place whereby transaction recorded in the journal are summarized and transferred to the ledger. It is an account that groups and totals the transaction that affects the various part of the business and can be classified based on assets, liabilities, and the equity. This process is called posting and checks for any accumulation of sum or figures throughout the figures or amounts are updated.
Keywords: books of accounts, journal, account, balance sheet, fixed assets, current assets, credit, debit, capital, Drawings, reserves.
Definition of Unadjusted Trial Balance
An unadjusted trial balance is an account that shows the balances of accounts in the general ledger. Most important step here is that the debit must equal the credit on the tabling, as this will make sure that all the transactions have been recorded correctly. In case the totals are not equal discrepancies should be identified and reconciled before further action is taken.
Keywords: unadjusted trial balance, trial balance, debits and credits
Adjusting Entries
Another process of the accounting cycle is the adjustments which follow the trial balance preparation. The totals at the bottom of each of the following columns represent reallocations made to the various accounts in the ledger for errors, omitted items, and accruals that may have occurred in the prior period. Adjusting entries are made at the end of an accounting period and normally affect assets, liabilities, revenues or expenses.
Keywords: real, accounts, accounts receivable, accounts payable, incomes and cost of sales.
Preparing an Adjusted Trial Balance After learning the necessity of an adjusted trial balance let’s go through the process of preparing the adjusted trial balance.
The adjusted trial balance comes after adjusting entries have been posted. This statement shows all accounts in the ledger entailing the adjusting entries made in relation to the taking off from this stage. Just like with the unadjusted trial balance, total of the debits should equal the total of credits, and any difference should be corrected before proceeding.
Keywords: adjusted trial balance, trial balance
The following are financial statement preparation:
Financial statements are the last section of the accounting cycle. While the income statement displays a company’s ability to generate income, and the balance sheet shows a company’s net worth at any given period, the statement of cash flows gives more information regarding the company’s financial policy. These statements are very important as used in the analysis of the organizations financial position and decision making.
Keywords: Accounting reports, trading account sheet, statement of expenditure, statement of assets and liabilities
Closing the Books
But the main step following preparation of the financial statements is to close the books, or the accounting cycle is at an end. As a part of this process, you close the temporary accounts like revenue and expenses accounts and transfer their balances to owner’s equity account. It enables an account to be blank that the company will use to record additional transactions which in turn help in balancing the accounts for the next accounting period.
Keywords: cutoff, temporary accounts, stockholders’ equity
Conclusion
Accounting cycle is a basic step that every business institution is obliged to undertake in order to keep proper records and prepare good financial statements. In this systematic approach to learning all aspects of accounting, we have discussed the entire process of accounting beginning with the transaction recording process to closing process. Our goal was to give them an expansive, yet simple and comprehensible theory that could easily be understood by an 8th and 9th grader in the US. The accounting cycle enables business to have a good information base with which to make good decisions.
