The Accounting Cycle

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 major steps:

Identify the transaction or other recognizable event.

Prepare the transaction's source document such as a purchase order or invoice.

Analyze and classify the transaction. This step involves quantifying the transaction in monetary terms (e.g. dollars and cents), identifying the accounts that are affected and whether those accounts are to be debited or credited.

Record the transaction by making entries in the appropriate journal, such as the sales journal, purchase journal, cash receipt or disbursement journal, or the general journal. Such entries are made in chronological order.

Post general journal entries to the ledger accounts.

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The above steps are performed throughout the accounting period as transactions occur or in periodic batch processes. The following steps are performed at the end of the accounting period:

Prepare the trial balance to make sure that debits equal credits. The trial balance is a listing of all of the ledger accounts, with debits in the left column and credits in the right column. At this point no adjusting entries have been made. The actual sum of each column is not meaningful; what is important is that the sums be equal. Note that while out-of-balance columns indicate a recording error, balanced columns do not guarantee that there are no errors. For example, not recording a transaction or recording it in the wrong account would not cause an imbalance.

Correct any discrepancies in the trial balance. If the columns are not in balance, look for math errors, posting errors, and recording errors. Posting errors include:
posting of the wrong amount,
omitting a posting,
posting in the wrong column, or
posting more than once.


Prepare adjusting entries to record accrued, deferred, and estimated amounts.

Post adjusting entries to the ledger accounts.

Prepare the adjusted trial balance. This step is similar to the preparation of the unadjusted trial balance, but this time the adjusting entries are included. Correct any errors that may be found.

Prepare the financial statements.
Income statement: prepared from the revenue, expenses, gains, and losses.
Balance sheet: prepared from the assets, liabilities, and equity accounts.
Statement of retained earnings: prepared from net income and dividend information.
Cash flow statement: derived from the other financial statements using either the direct or indirect method.


Prepare closing journal entries that close temporary accounts such as revenues, expenses, gains, and losses. These accounts are closed to a temporary income summary account, from 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.

Prepare the after-closing trial balance to make sure that debits equal credits. At this point, only the permanent accounts appear since the temporary ones have been closed. Correct any errors.

Prepare reversing journal entries (optional). Reversing journal entries often are used when there has been an accrual or deferral that was recorded as an adjusting entry on the last day of the accounting period. By reversing the adjusting entry, one avoids double counting the amount when the transaction occurs in the next period. A reversing journal entry is recorded on the first day of the new period.

Instead of preparing the financial statements before the closing journal entries, it is possible to prepare them afterwards, using a temporary income summary account to collect the balances of the temporary ledger accounts (revenues, expenses, gains, losses, etc.) when they are closed. The temporary income summary account then would be closed when preparing the financial statements.



Accounting Cycle: Accounting Cycle Overview

Description: The Accounting Cycle is a series of steps which are repeated every reporting period. The process starts with making accounting entries for each transaction and goes through closing the books. Use this tutorial for an overview of the accounting cycle, covering activities required both during and at the end of the accounting period.

Accounting Cycle - Steps During the Accounting Period
These accounting cycle steps occur during the accounting period, as each transaction occurs:
Identify the transaction through an original source document (such as an invoice, receipt , cancelled check, time card, deposit slip, purchase order) which provides:
date
amount
description (account or business purpose)
name and address of other party (if practical)
Analyze the transaction – determine which accounts are affected, how (increase or decrease), and how much
Make Journal entries – record the transaction in the journal as both a debit and a credit
journals are kept in chronological order
journals may include sales journal, purchases journal, cash receipts journal, cash payments journal, and the general journal
Post to ledger – transfer the journal entries to ledger accounts
ledger is kept by account
ledger accounts may be T-account form or include balances
(Learn more about the Chart of Accounts.)

Accounting Cycle: Steps at the end of the accounting period
These accounting cycle steps occur at the end of the accounting period:
Trial Balance – this is a calculation to verify the sum of the debits equals the sum of the credits. If they don’t balance, you have to fix the unbalanced trial balance before you go on to the rest of the accounting cycle. (If they do balance you could still have a problem, but at least it balances!)
Adjusting entries – prepare and post accrued and deferred items to journals and ledger T-accounts
Adjusted trial balance – make sure the debits still equal the credits after making the period end adjustments
Financial Statements – prepare income statement, balance sheet, statement of retained earnings, and statement of cash flows (this can occur at other points in time with appropriate adjustments)
Closing entries – prepare and post closing entries to transfer the balances from temporary accounts (such as the revenue and expenses from the income statement to owner’s equity on the balance sheet).
After-Closing trial balance – final trial balance after the closing entries to make sure debits still equal credits.


Accounting Cycle. Adujusting Entries. Accounting Period

Steps of the accounting cycle.

The steps of the accounting cycle are a systematic design of fundamental accounting practices. These fundamentals are to 1) collect and analyze data, 2) record the effects of the data, 3) summarize the effects of the data, and 4) prepare the data for report (Albrecht, et al., 2005, Sequence of the accounting cycle, p. 11).

Adjusting entries may be necessary at the end of each accounting period.

Journal entries are necessary to make at the end of each accounting period so as to properly distribute gathered data to its specific pertinent period. Accrued and deferred data are examples of the data gathered.

Incomplete steps of the accounting cycle in a specific accounting period.

If all of the steps of the accounting cycle are not completed, the closing process cannot be completed; and dependent upon the scenario, authorities or a specific index can de-list or downgrade the listing of companies to exist in a smaller market cap index.


The Accounting Cycle: Adjusting and Closing the Books

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Accounting Cycle

The primary objectives of the accounting function in an organization are to process financial information and to prepare financial statements at the end of the accounting period. Companies must systematically process financial information and must have staff who prepare financial statements on a monthly, quarterly, and/or annual basis. To meet these primary objectives, a series of steps is required. Collectively these steps are known as the accounting cycle. The steps, applicable to a manual accounting system, are described below. Later, there will be a brief discussion of a computerized processing system.

The Steps of the Cycle
Collect and analyze data from transactions and events: As transactions and events related to financial resources occur, they are analyzed with respect to their effect on the financial position of the company. As an example, consider the sales for a day in a retail establishment that are collected on a cash register tape. These sales become inputs into the accounting system. Every organization establishes a chart of accounts that identifies the categories for recording transactions and events. The chart of accounts for the retail establishment mentioned earlier in this paragraph will include Cash and Sales.
Journalize transactions: After collecting and analyzing the information obtained in the first step, the information is entered in the general journal, which is called the book of original entry. Journalizing transactions may be done continually, but this step can de done in a batch at the end of the day if data from similar transactions are being sorted and collected, on a cash register tape, for example. At the end of the day, the sales of $4,000 for cash would be recorded in the general journal in this form:
Cash 4000
Sales 4000
Post to general ledger: The general journal entries are posted to the general ledger, which is organized by account. All transactions for the same account are collected and summarized; for example, the account entitled "Sales" will accumulate the total value of the sales for the period. If posting were done daily, the "Sales" account in the ledger would show the total sales for each day as well as the cumulative sales for the period to date. Posting to ledger accounts may be less frequent, perhaps at the end of each day, at the end of the week, or possibly even at the end of the month.
Prepare an unadjusted trial balance: At the end of the period, double-entry accounting requires that debits and credits recorded in the general ledger be equal. Debit and credit merely signify position— left and right, respectively. Some accounts normally have debit balances (e.g., assets and expenses) and other accounts have credit balances (e.g., liabilities, owners' equity and revenues). As transactions are recorded in the general journal and subsequently posted to the ledger, all amounts recorded on the debit side of accounts (i.e., recorded on the left side) must equal all amounts recorded on the credit side of accounts (i.e., recorded on the right side). Preparing an unadjusted trial balance tests the equality of debits and credits as recorded in the general ledger. If unequal amounts of debits and credits are found in this step, the reason for the inequality is investigated and corrected before proceeding to the next step. Additionally, this unadjusted trial balance provides the balances of all the accounts that may require adjustment in the next step.
Prepare adjustments: Period-end adjustments are required to bring accounts to their proper balances after considering transactions and/or events not yet recorded. Under accrual accounting, revenue is recorded when earned and expenses when incurred. Thus, an entry may be required at the end of the period to record revenue that has been earned but not yet recorded on the books. Similarly, an adjustment may be required to record an expense that may have been incurred but not yet recorded.
Prepare an adjusted trial balance: As with an unadjusted trial balance, this step tests the equality of debits and credits. However, assets, liabilities, owners' equity, revenues, and expenses will now reflect the adjustments that have been made in the previous step. If there should be unequal amounts of debits and credits or if an account appears to be incorrect, the discrepancy or error is investigated and corrected.
Prepare financial statements: Financial statements are prepared using the corrected balances from the adjusted trial balance. These are one of the primary outputs of the financial accounting system.
Close the accounts: Revenues and expenses are accumulated and reported by period, either a monthly, quarterly, or yearly. To prevent their not being added to or comingled with revenues and expenses of another period, they need to be closed out—that is, given zero balances—at the end of each period. Their net balances, which represent the income or loss for the period, are transferred into owners' equity. Once revenue and expense accounts are closed, the only accounts that have balances are the asset, liability, and owners' equity accounts. Their balances are carried forward to the next period.
Prepare a post-closing trial balance: The purpose of this final step is two-fold: to determine that all revenue and expense accounts have been closed properly and to test the equality of debit and credit balances of all the balance sheet accounts, that is, assets, liabilities and owners' equity.





Accounting Period

What Does Accounting Period Mean?
1. In general, the time period reflected by a set of financial statements.

2. In terms of taxation, it is the 12-month period a taxpayer uses to determine his or her income tax.


Accounting Period
1. The period of time reflected in financial statements. Usually, the accounting period is either the calendar year or a quarter. For example, publicly-traded companies must report their financial state for the accounting period since their previous report.

2. In the United Kingdom, the period for which corporate taxes are assessed.

Farlex Financial Dictionary. © 2009 Farlex, Inc. All Rights Reserved
Accounting Period
The period (normally 12 months) that a taxpayer uses to determine federal income tax liability. Unless a taxpayer makes a specific choice to the contrary, his accounting period is the calendar year.


Accounting Period

a length of time for which businesses may prepare internal accounts so as to monitor progress on a weekly, monthly, or quarterly basis. Accounts are generally prepared for external purposes on an annual basis.


Accounting period

The period of time for which a company reports on its financial activity, usually one year, although interim reports are often drawn up at monthly, quarterly or half-yearly intervals for use by management or the financial markets.

An accounting period is a period with reference to which United Kingdom corporation tax is charged.[1] It helps dictate when tax is paid on income and gains. An accounting period begins whenever a company comes within the corporation tax charge, and whenever an accounting period ends without the company ceasing to be within the charge. There are a number of rules about when an accounting period ends, and we look at each of these below.

Often an accounting period coincides with a company's period of account. This is the period for which it draws up accounts,[2] except for a life assurance company, where it is the period for which it draws up its periodical return.[3] However, periods of account and accounting periods do not necessarily coincide

Basic rules

An accounting period begins when:[4]
the company comes within the charge to corporation tax. A company usually first comes within the corporation tax charge when it first acquires a source of income.[5] However, it will also come within the charge if it commences business but is not already within the charge.[6] Overseas companies usually come within the charge if they become UK resident or start trading in the UK through a UK permanent establishment;[7][8]
an accounting period of the company ends, and the company is still within the charge to corporation tax; or
the company does not currently have an accounting period and has a chargeable gain or allowable loss.[9] Chargeable gains and allowable losses are taxable gains and tax relievable losses that arise on the disposal of certain capital assets, for example on the disposal of the company's head office.[10]

An accounting period ends on the earliest of the following:[11]
the expiration of 12 months from the beginning of the accounting period;
an accounting date of the company or, if there is a period for which the company does not draw up accounts, the end of that period;
the company beginning or ceasing to trade or to be, in respect of the trade or (if more than one) of all trades carried on by it, within the charge to corporation tax;
the company beginning or ceasing to be UK resident;
the company ceasing to be within the charge to corporation tax.

There are further rules to deal with windings up, life assurance companies and lessor companies.