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Accounting Basics : What Is The Accounting Cycle?

Businesses need to ensure that their financial records are accurate, up-to-date, and in accordance with accepted accounting principles. They can achieve this objective by following the accounting cycle.

These are the steps that make up the accounting cycle...

1) Analyze

The first step is to analyze all transactions from the past year and to locate and file relevant documents for them.

2) General Journal

Next, it is necessary to create a central record of all of the transactions. This record is referred to as a General Journal.

3) Posting

Following the journalizing of transactions, they are then transferred and posted to the ledger. This paper / electronic trail is important to verify accuracy and to refer to if accounts are found not to be balancing up later on.

4) The Unadjusted Trial Balance

Next, debit and credit balances are totaled and compared to check that they are equal. This is also when information is compiled from the ledger for use in preparing financial statements.

5) Adjustment

Having recorded and verified external transactions (like utility payments and supply purchases), internal transactions (like unearned revenue and prepaid rent) must now be factored in.

6) The Adjusted Trial Balance

The trial balance, which now encompasses both external and internal transactions, is now checked for accuracy. Credit and debit sums should be equal, otherwise a mistake has been made in one of the earlier steps.

7) Business Financial Statements

At this stage, a number of important financial statements are created. The Income Statement and Statement of Owner's Equity first, followed by the Balance Sheet.

8) Closing Of The Trial Balance

Permanent accounts now have their balances carried into the next period, while temporary accounts are closed. The last entries made in those accounts are posted to the capital account of the business, after which all balances (expense, revenue, withdrawal, etc.) should be zero.

9) Post-Closing Trial Balance

The final step is to list the balances of non-closed accounts, such as assets and liabilities. This verifies that all permanent accounts balance i.e. that they have equal credit and debit sums.

It is important that business owners understand the steps involved in this accounting cycle. The reason is that they are ultimately responsible for any mistakes, whether by accident or not, in their finances. That is not so say that they should do all of their accounting themselves, that would also be a mistake. Rather, the point is that proper accounting is so important to a business that it pays to be fully aware of what needs to be done, but to seek professional assistance in the doing of those things.

Hiring a reputable accounting firm is therefore highly advisable. They will offer peace of mind that the accounting cycle is being appropriately followed through with, and will also be able to offer advice on how to better organize the finances of the business in the future.

Article Source: http://articlebarracks.com

This article was written by an experienced accountant. You can learn more about them, and also find further accounting advice, by visiting: Five Dock Accounting

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