Accounting Cycle

A company completes a number of steps during each accounting period to record, store and report the accounting information contained in its transactions. These steps are referred to as the accounting cycle. There are several steps that are included in recording, storing and reporting the accounting transactions and they are as follows:

• Record transactions in the journal.
• Post transactions to the ledger accounts.
• Prepare adjusting entries at the end of the fiscal period and post to the ledger accounts.
• Prepare summary of the account balances.
• Prepare income statements from revenue and expenses account balance.
• Close revenue and expenses accounts to the retained earnings.
• Prepare post closing summary of the account balances.
• Prepare balance sheet and statement of cash flows.  

These are the manual accounting system, which was followed by most of the companies but nowadays many of the company uses a computer system based on accounting software. This software follows the same procedure as a manual system.

Record in the General Journal: A company initially records its transactions (and events) in a journal. A company could record all its transactions in a single journal called as the general journal. However many companies maintains different journal for different accounts.

Posting to the ledger:  After a company journalizes its transactions and events in a general journal, it updates each account in the general ledger. This is done through the process of posting.

Trail Balance:  After a company prepares and posts its journal entries for the accounting period, it determines the balance in each account. Then a trail balance is often prepared. A trail balance is a working paper that lists all the company’s general ledger accountants and their account balances.

Preparation of adjusting entries: Most of the companies use GAAP which requires the actual method of accounting. Under actual accounting, a company records revenues in the accounting period in which they are earned and realized. A company should adjust certain entries so that all its expenses and revenues and balance sheet accounts have correct endings balances.

Once all the accounts are adjusted the company prepares financial statements and then prepares and post closing entries for revenue, expense and dividend accounts.

Questionnaire:

• What is accounting cycle?
• What are the steps involved in accounting cycle?