A Step By Step Guide To The Accounting Cycle

Posted by admin on February 6, 2010 under Uncategorized | Be the First to Comment

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) Journalize

Next, it is necessary to create a central record of all of the transactions. This record is referred to as a General Journal.

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 trial balance, which now encompasses both external and internal transactions, is now checked for accuracy. Credit and debit sums should be equal, otherwise a mistake has been made in one of the earlier steps.

7) Financial Statements

The Income Statement, Statement of Owner’s Equity and Balance Sheet are now created.

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

The final step is to list the balances of non-closed accounts, such as assets and liabilities. This verifies that all permanent accounts balance i.e. that they have equal credit and debit sums.

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This article was written by an experienced accountant. You can learn more about them, and also find further accounting advice, by visiting: Tax Accounting Five Dock