Friday, January 1, 2010
The Steps Of The Accounting Cycle
Posted on 10:47 AM by programlover
The Steps Of The Accounting Cycle by Mark Walters
in Accounting (submitted 2009-12-31)
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The accounting cycle is used to analyze and summarize business transactions and events, and it helps businesses of all sizes ensure that their financial records are accurate, up-to-date, and in accordance with accepted accounting principles.
These are the steps that make up the accounting cycle...
1) Analysis
The first step is to analyze all transactions from the past year and to locate and file relevant documents for them.
2) General Journal
Next, transactions are recorded in a General Journal, so that there is a central record of all transactions.
3) Posting To The Ledger
Once a General Journal has been created, each transaction should then be posted to the ledger, which is a paper / electronic trail that is used to both verify accuracy and to refer to if balances do not tally later on.
4) The Unadjusted Trial Balance
The next step is to total up debit and credit balances to ensure that they are equal. Information from the ledger should also be compiled so that financial statements can be prepared.
5) Adjusting
Having recorded and verified external transactions (like utility payments and supply purchases), internal transactions (like unearned revenue and prepaid rent) must now be factored in.
6) The Adjusted Trial Balance
The preparation of the adjusted trial balance is the next task, which encompasses all internal and external transactions for the reporting period. Again, there accuracy is verified, by ensuring the credit and debit sums are equal.
7) Business Financial Statements
At this stage, a number of important financial statements are created. The Income Statement and Statement of Owner's Equity first, followed by the Balance Sheet.
8) Closing Of The Trial Balance
Temporary accounts are closed, while permanent carry their balances into the next period. Closing entries are recorded and posted to the business's capital account. Once that is done, all balances (revenue, expense, withdrawal, etc.) should be zero.
9) Post-Closing Trial Balance
Finally, comes the post-closing trial balance, which lists the balances of the accounts that were not closed (such as liabilities, assets, and owner's equity). This trial balance helps verify that permanent accounts balance (i.e. that they have equal debit and credit sums) and that all temporary accounts were properly closed.
These are the steps that make up the accounting cycle...
1) Analysis
The first step is to analyze all transactions from the past year and to locate and file relevant documents for them.
2) General Journal
Next, transactions are recorded in a General Journal, so that there is a central record of all transactions.
3) Posting To The Ledger
Once a General Journal has been created, each transaction should then be posted to the ledger, which is a paper / electronic trail that is used to both verify accuracy and to refer to if balances do not tally later on.
4) The Unadjusted Trial Balance
The next step is to total up debit and credit balances to ensure that they are equal. Information from the ledger should also be compiled so that financial statements can be prepared.
5) Adjusting
Having recorded and verified external transactions (like utility payments and supply purchases), internal transactions (like unearned revenue and prepaid rent) must now be factored in.
6) The Adjusted Trial Balance
The preparation of the adjusted trial balance is the next task, which encompasses all internal and external transactions for the reporting period. Again, there accuracy is verified, by ensuring the credit and debit sums are equal.
7) Business Financial Statements
At this stage, a number of important financial statements are created. The Income Statement and Statement of Owner's Equity first, followed by the Balance Sheet.
8) Closing Of The Trial Balance
Temporary accounts are closed, while permanent carry their balances into the next period. Closing entries are recorded and posted to the business's capital account. Once that is done, all balances (revenue, expense, withdrawal, etc.) should be zero.
9) Post-Closing Trial Balance
Finally, comes the post-closing trial balance, which lists the balances of the accounts that were not closed (such as liabilities, assets, and owner's equity). This trial balance helps verify that permanent accounts balance (i.e. that they have equal debit and credit sums) and that all temporary accounts were properly closed.
