Define The Accounting Cycle
What is the accounting cycle?
The accounting cycle is the way that accountants process and report an organization’s transactions. Accountants will analyze and record the activity of the business to then prepare the business’s financial statements. The cycle consists of a series of steps to with the end goals of reporting financials timely, consistently, and accurately.
What are the steps to the accounting cycle?
1. Identifying Transactions
The accounting cycle is the way that accountants process and report an organization’s transactions. Accountants will analyze and record the activity of the business to then prepare the business’s financial statements. The cycle consists of a series of steps to with the end goals of reporting financials timely, consistently, and accurately.
2. Recording Transactions
Once the accountant identifies the transactions, they are recorded onto the accounting software. Accrual basis of accounting uses double-entry book-keeping in that all transactions have at least two accounts that will be affected. For example, if a business purchases a vehicle for $10,000 with cash, the business will debit to record an increase in fixed assets (vehicle) for $10,000 and credit $10,000 in cash to records its decrease.
3. Preparing Trial Balance
All transactions are then posted to the general ledger. The general ledger is a broad but comprehensive record of all accounts used in the business. Examples of accounts include service revenue, interest expense, operating account cash balance, accounts receivable balance, and retained earnings to name a few. The trial balance will show a list of the accounts and the recorded amounts at the period end.
4. Recording Adjusting Entries
Accountants will then make any adjustments to the books as needed.The purpose is to record other transactions that have occurred but have not yet been recorded onto the books.Common adjusting entries include depreciation expense, amortization expense, any changes in accrued or prepaid expenses, and unearned revenue recognition.
5. Closing the Books
The account will close the books on the temporary accounts (revenue and expenses). The balances will close to the retained earnings account.
6. Preparing the Financial Statements
The accountant will lastly prepare the organizations financial statements. The statements include balance sheet, income statement, statement of cash flow, and statement of retained earnings..
The accounting cycle can be slightly different when considering the complexity of an organizations industry. Additionally, advancements in accounting software have made the process more efficient; however, the fundamental principals of the accounting cycle remain consistent.