Accounting Cycle Paper

As per quickmba.com, Accounting cycle means "The sequence of activities beginning with the occurrence of a transaction is known as the accounting cycle." As per Netmba.com "The accounting process is a series of activities that begins with a transaction and ends with the closing of the books."

Hence accounting cycle starts from recording of transaction then preparation of financial statements. This involves preparing accounting entries for each transaction and goes through closing the books. Let us understand the steps of accounting cycle:

1) Identify the Transaction

The transactions would be identified from the source documents. Source documents are those documents which provide evidence to the transaction. Few examples of source documents include a receipt, an invoice, check book and a bank statement. The amount of the transaction and accounts of the transaction are identified.

2) Journalize the transaction

This will require recording the accounts either on debit side. For example, a company paid salary. In the Cash Payments Journal, you would debit Salary and credit Cash. Debit and credit are the rules to record the transactions. Every transaction can be described in its debit/credit form. Debit increases with the increase in Assets, Expenses and dividends. It decreases when there is decline in Assets or expenses. Credit increases with the increase in Liabilities, equity and revenues. It decreases with the decrease in liabilities.

3) Ledger Posting

After recording the transaction in journal, next step is to prepare the ledger. The journal entries will be posted in the ledger accounts or T accounts.

4) Trial Balance This shows the summary of all the accounts of the organization. This helps in checking the arithmetical accuracy of the accounts of the business. Total debits must equal total credits.

5) Adjusting Entries These are made for prepaid or outstanding transactions. This is prepared by using the trial balance and other relevant information. This may mean that an account such as Supplies, prepaid insurance etc. may need to be adjusted. These are made for fair disclosure of the transactions. The categories are 1. Items of multi period in nature: For example some revenue and expense items may relate to more than one accounting period like unearned revenues. 2. ACCRUED ITEMS: Some revenue and expense items have been earned or incurred in a given period, but not yet entered into the accounts (accruals).

Thus adjusting process helps in assigning costs and revenues to each period in an appropriate manner. Hence adjusting entries are made for accrued and deferred items.

6) Adjusted Trial Balance Revised trial balance is prepared after recording the adjusting entries. At this point, the various financial statements may be presented based on the updated figures and balances of all accounts. One might prepare the worksheet. This is a preliminary informal calculation of the financial position of a company is accomplished with the preparation of a worksheet. Revenues and expenses are compared, with their difference representing income (Profit or Loss). Assets are compared with liabilities and equity to assure everything is in balance. Once the worksheet balances are proven, a formal Income Statement and Balance Sheet are prepared. (Tcc, 2009)

7) Preparation of Financial statements This involves preparation of all the four statements. Financial Statements is designed primarily to assist stakeholders in deciding where to place their scarce investment resources. It is also used to help management to know the performance of organization. Accountants summarize this information in a balance sheet, income statement, and statement of stockholder's equity and statement of cash flows.

8.) Closure of Books This will be done by transferring the balances of temporary accounts and preparing of after closing trial balance. "The Final Trial Balance lists the Balance Sheet Accounts, or Real Accounts, after the Income Statement Accounts are closed. The balances in each account are then carried forward into the next reporting period." (Business-accounting-guides, 2009)

References:

http://www.quickmba.com/accounting/fin/cycle/ http://www.netmba.com/accounting/fin/process/. It is a snapshot of the page as it appeared on 11 Feb 2009 16:07:47 GMT. http://www.college-cram.com/study/accounting/presentations/16. http://www.business-accounting-guides.com/accounting-cycle.html. It is a snapshot of the page as it appeared on 7 Feb 2009 02:46:42 GMT http://www.tcc.edu/faculty/webpages/MBryan/QuizMaterial-ACCCycle/BasicsAccountingCycle.pdf.