Principles of Accounts

Principles of Accounts

Accounting Cycle

Open Ended

What is meant by the term accounting cycle?

Accounting cycle

The sequence of accounting procedures used to record, classify, and summarize accounting

information in financial reports at regular intervals is often termed the accounting cycle.

Step 1: journalize (record) transactions

First, you look at the beginning account balance for each account. Then, you look at the transactions that have taken place during the past period. What did the business spend money on? What accounts are affected by these transactions? Are these transactions related to assets, liabilities, or stockholders’ (owner’s) equity?

Step 2: post each journal entry to the appropriate ledger accounts

Remember that an asset is anything your company owns, including cash. Even if the building your company owns has a mortgage on it, the building itself is still considered to be an asset. A liability is anything your company owes to someone outside of the business owner. Stockholders’ or owners’ equity is the same thing as net worth. It’s the difference between what the company owes and what it owns.

Once you answer these questions for any given entry, you’ll make a journal entry

Step 3: prepare a trial balance

A trial balance tells the company its unadjusted balances in each account. 

Step 4: making end-of-period adjustments

A worksheet is created and used to ensure that debits and credits are equal. If there are differences then adjustments will need to be made.

In addition to identifying any errors, adjusting entries may be needed for revenue and expense matching when using accrual accounting.

Step 5: preparing an adjusted trial balance

An adjusted trial balance is prepared after adjusting entries are made and posted to the ledger. Adjusting entries are prepared at the end of the accounting period for: accrual of income, accrual of expenses, deferrals, prepayments, depreciation, and allowances.

Step 6: preparing financial statements

After the company makes all adjusting entries, it then generates its financial statements in the seventh step. For most companies, these statements will include an income statement, balance sheet, and cash flow statement.

Step 7: journalizing and posting closing entries

The company performs this step after it has prepared financial statements. In contrast to the steps in the cycle that you have already studied, companies generally journalize and post closing entries only at the end of the annual accounting period. Thus, all temporary accounts will contain data for the entire year.

Step 8: Preparing an after-closing trial balance.

This the last step of accounting cycle and is prepared after making and posting all necessary closing entries to relevant ledger accounts. Since closing entries close all temporary ledger accounts, the post-closing trial balance consists of only permanent ledger accounts (i.e, balance sheet accounts). The purpose of preparing a post-closing trial balance is to assure that accounts are in balance and ready for recording transactions in the next accounting period.

Open Ended

What happens if you miss a step in the accounting cycle?

Evaluation

Oral presentation