The primary purpose of the accounting function in an organization is to process financial information and to prepare financial statements at the end of the accounting period. To meet the purposes, a series of steps are required. The Accounting Cycle is a nine-step standardized practice used by organizations to record and calculate financial transactions & activities that will be discussed through this post.
Analyzing the Business Transition
The documents are analyzed in the first stage to determine the nature of accounts or transition. The source of documents is checking banks statements and other financial measures that are relevant to be journalized in the next step.
Journalize Transition
In the second step of the accounting process, the transaction ae journalized in a journal book of original entry. The accountant uses double-entry accounting was each transaction is recorded in two accounts namely debit and credit. The journal entries consist of debit and credit amount, the date transaction and description about the transaction. It can also be called a summary of all business accounts.
Posting to a Ledger Account
After journalizing the information is posted to general ledger accounts. ledger books of final entry are a detailed collection of all accounts. transaction recorded in the journal ledger is used to create financial statements of the company. This also assures that the company has a complete accounting transaction record. each transaction impacts subsidiary ledger.
Preparing a Trial Balance
the entries of a particular period are summarized. This does guarantee no errors were made. this is done to verify that the sum of debits is equal to the sum of credits. there is a difference between the two values. By doing adjustments in the unadjusted trial balance.
Journalize and Post Adjustments
Adjustments are made for accrued and differed items. the entries are journalized and posted in the ledger. The actual position is made to know basically, by these adjustments of the company. Normalization and post adjustments follow the principle of matching from the double-entry bookkeeping system.
Prepare an Adjusted Trial Balance
After new entries are made, a new trial balance is calculated to test if the debits are equal to credits. The trial balance shows the balance of all the accounts that also includes adjusting entries at the end of an accounting period. It will help you clear the financial events that happened in the company throughout the accounting cycle.
Prepare Financial Statements
The financial statements summarize the changes that occur from the business transaction in the accounting period. it is one of the last phases in the company reporting period that tells the financial condition of the company with its cash flow.
The company has primarily 3 financial statements:
- Income statement sheet explains the expenses and revenue of a company. Also known as Profit and Loss Statement.
- The Balance Sheet contains the assets and liabilities of a company. Assets are listed in the right column and Liabilities are listed in the left column.
- Cash Flow Statement the money generated by the company and utilized in the given time of the accounting system. It has 3 categories: Operating activities, investing activities and financing activities.
Journalize and post-closing Entries
The balances in the temporary accounts are closed or reduced to zero and the net income or loss is transferred to the capital accounts to prepare for the next financial accounting period. The balances at the end of the year will be the basis for the next fiscal year as an opening balance. Closing entries are only made for the temporary accounts and not for permeant accounts, not for balance sheets.
Preparing a post-closing Trial Balance
This is done in order to determine that all revenue and expenses accounts have been properly closed and to ensure total credit and debt are equal after putting closing entries. The only entries that remain in the book are permeant entries namely assets, liabilities and owner’s equity
Learn More: Bad Debts Accounting: How Bad Debts Can Affect Your Business
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Read more: Audited Financial Statements
What is an accounting and why is it important?
Accounting is known as the language of business because it deals with interpreting and communicating information about a company's operations and finances.
What does audit mean in accounting?
An audit is the examination of a company’s financial and accounting records, as well as the physical inspection of its assets.
