Accounting Cycle – The Process

Here you can find a scheme of Accounting Cycle and its steps. Accounting Cycle represents the process, which should be followed in order to account for business transactions properly and provide accounting data to the its users for decision making purposes.

Below you will be able to inspect each step of the cycle separately and understand, what exact steps and actions must be taken under each of them.

PLEASE FOLLOW THE LINKS BELOW TO GO THROUGH THE ACCOUNTING CYCLE STEPS:

1. Analyze, journalize transactions

2. Summarize accounts, general ledger posting

3. Trial balance preparation

4. Period-end adjusting entries

5. Adjusted trial balance preparation

6. Preparation of financial statements

7. Close general ledger accounts (income/expenses)

accountingcycle

Step 7:  Here we will be covering accounting cycle and we will be analyzing what actions need to be done in order to record business transactions properly and to prepare financial statements.  So if we go to the accounting cycle the accounting cycle is a process of certain actions and those actions are the following it is analyzing.  It is recording and it is summarizing of a financial data and that financial data it is of course a financial data of the business and this financial data is actual transactions which happen during the certain period of time and which had an impact on the financial position of the business.

If transaction was not impacting financial position of the business it should not be recorded and it should not be reflected in the accounting records.  So the purpose of the accounting cycle is the following first one is to prepare financial statements of course the aim of the accounting is their main objective of aim is to prepare financial statements and also the accounting cycle must insure that we have an accurate and timely prepared financial data based on which the users of the data can make decisions and financial data it should provide results for the periods of profit and loss and also it should provide the structure of the assets and financing sources.

Its liabilities and equity and this is reflected at the end of the accounting period so these are the main objectives which financial data should meet and what should be included in the financial data.  So what are the steps of the accounting cycle?  These are the steps that should be followed and first of all we analyze and generalize transaction summarize accounts and post entries to general ledger then we prepare trial balance then we record adjusting entries then we prepare adjusting balance, prepare financial statements and close general ledger accounts and thirdly we will be covering a bit detail each step so first step is to record to analyze and generalize transaction or to record transactions.

So what we do here, here analyze all the transactions and we record only those which had impact on the financial position of the business so if there was no change in assets liabilities equity or income or expenses such transactions should be recorded.  The records of the transactions at first I made in the general journal and afterwards we go to the step two.  Afterward record all the transactions we summarize those records and we post those entries to the general ledger and this is done at the end of the accounting period usually a month and general ledger it includes different accounts which summarize the financial data and which group of financial data into certain groups like different categories of assets, liabilities and equity.

So we take data from general journal where it is recorded from the first day through the whole month and we put it into the general ledger in order to classify and group that data into certain categories.  What we do next we calculate balances of each accounting general ledger and we make a list of those balances and such list is a trial balance which is a summary of all general ledger accounts and trial balance shows those balances and total debutant credit balances must be equal in order to present and prepare trial balance correctly and this trial balance will be further used to prepare financial statements.

Also the next step what we should follow is to record adjusting interest.  Why the step is needed.  There might be certain data and certain facts which will not be recorded during the month which will not be related to the transactions of the current month.  Those items they might be related to previous transactions which occurred during previous periods but have impact on the future periods there might be also some data which became known only at the end of the month therefore we need to analyze such data and record it in addition to the general journal and posted it into the general ledger.

An example can be a calculation of depreciation for the assets which were acquired earlier consumptions of inventory or getting some invoices for utilities or telephone services at the end of the month and those items went off known during the month and recording of such data is called making adjusting interest so we adjust accounting records by this additional data.  After we will do that we must prepare adjusted trial balance.  This is the same as trial balance however it includes adjusting entries and additional information which was recorded while adjusting interest was made and this is the final list of all the balances of general ledger accounts and those balances they are used to prepare financial statements.

So we take adjusted trial balance and from that we take balances required and we prepare balance sheet and income statement and this is the step number 6 of the accounting cycle so this is the result of the accounting cycle and in financial statements and one more I thing we need to do after we prepare financial statements we need to close certain general ledger accounts.  There are accounts in general ledger which I used only for a particular period of time so they should have 0 balances and their balances, their transferred to another account.

Those accounts are revenue and expenses accounts and we use revenue and expenses accounts only for current period for example month or quarter accounting period and after that period ends we close revenue and expense accounts by transferring their balances to the retained earning account or accumulated profit account so at the end of each accounting period revenue and expense accounts should have 0 balances and they will be again used during the next accounting periods and again we will be closing them by transferring the data to retained earnings or accumulated profit account.

This is needed in order to calculate the result of operations which also one of the objectives of the accounting cycle to show profit or loss which was earned or incurred during the current accounting period that is why we will be closing those accounts.  The accounts assets equity and liabilities are not closed.  They will be continuously used for all the accounting periods and they will be accumulating the accounting data related to those accounts and balances of those items.