The Accounting Process (The Accounting Cycle)
The accounting process is a series of activities that begins with a transaction and ends with the closing of the books. Because this process is repeated each reporting period, it is referred to as the accounting cycle and includes these a!or steps" #. $dentify the transaction or other recogni%able event. 2. Prepare the transaction&s source docu ent such as a purchase order or invoice. '. Analy%e and classify the transaction. This step involves (uantifying the transaction in onetary ter s (e.g. dollars and cents), identifying the accounts that are affected and whether those accounts are to be debited or credited. 4. )ecord the transaction by aking entries in the appropriate !ournal, such as the sales !ournal, purchase !ournal, cash receipt or disburse ent !ournal, or the general !ournal. *uch entries are ade in chronological order. +. Post general !ournal entries to the ledger accounts
The above steps are perfor ed throughout the accounting period as transactions occur or in periodic batch processes. The following steps are perfor ed at the end of the accounting period"
6. Prepare the trial balance to ake sure that debits e(ual credits. The trial balance is a listing of all of the ledger accounts, with debits in the left colu n and credits in the right colu n. At this point no ad!usting entries have been ade. The actual su of each colu n is not eaningful, what is i portant is that the su s be e(ual. -ote that while out.of.balance colu ns indicate a recording error, balanced colu ns do not guarantee that there are no errors. /or e0a ple, not recording a transaction or recording it in the wrong account would not cause an i balance. 1. Correct any discrepancies in the trial balance. $f the colu ns are not in balance, look for ath errors, posting errors, and recording errors. Posting errors include"
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posting of the wrong a ount,
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o itting a posting, posting in the wrong colu n, or posting ore than once.
8. Prepare ad!usting entries to record accrued, deferred, and esti ated a ounts. 2. Post ad!usting entries to the ledger accounts. #3. Prepare the ad!usted trial balance. This step is si ilar to the preparation of the unad!usted trial balance, but this ti e the ad!usting entries are included. Correct any errors that ay be found. 11. Prepare the financial state ents.
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$nco e state ent" prepared fro the revenue, e0penses, gains, and losses. Balance sheet" prepared fro the assets, liabilities, and e(uity accounts. *tate ent of retained earnings" prepared fro net inco e and dividend infor ation. Cash flow state ent" derived fro the other financial state ents using either the direct or indirect ethod.
12. Prepare closing !ournal entries that close te porary accounts such as revenues, e0penses, gains, and losses. These accounts are closed to a te porary inco e su ary account, fro which the balance is transferred to the retained earnings account (capital). Any dividend or withdrawal accounts also are closed to capital. #'. Post closing entries to the ledger accounts. #4. Prepare the after.closing trial balance to ake sure that debits e(ual credits. At this point, only the per anent accounts appear since the te porary ones have been closed. Correct any errors. 15. Prepare reversing !ournal entries (optional). )eversing !ournal entries often are used when there has been an accrual or deferral that was recorded as an ad!usting entry on the last day of the accounting period. By reversing the ad!usting entry, one avoids double counting the a ount when the transaction occurs in the ne0t period. A reversing !ournal entry is recorded on the first day of the new period.
$nstead of preparing the financial state ents before the closing !ournal entries, it is possible to prepare the afterwards, using a te porary inco e su ary account to collect the balances of the te porary ledger accounts (revenues, e0penses, gains, losses, etc.) when they are closed. The te porary inco e su ary account then would be closed when preparing the financial state ents.
