The Accounting Cycle
The accounting cycle is the sequence of procedures used to keep track of what has happened in the business and to report the financial effect of those things. Following is a depiction of the steps in the accounting cycle and a brief description of each.
STEP
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DESCRIPTION
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Transaction
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Basically, a transaction
is doing business. A financial transaction (which is the kind of transaction
we are interested in here) is doing something in business that involves the
exchange of money.
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Business Paper or
Computer Record
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Usually, the accounting
department is not where the transaction takes place. It is necessary that a
paper or computer record be prepared at the point-of-sale so that the
accounting department is aware that a transaction occurred.
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Analyze
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When personnel in
accounting get the business paper, it is necessary to determine:
1.) What happened? What kind of business
took place? Did we charge our customer for something, get money for
something, buy something, etc.?
2.) What accounts will change? An account
(Asset, Liability, Owner's Equity) is where we keep information on anything
we wish to know about individually. For example, we have an account for money
(Cash) where we keep track of the increases, decreases and the balance. Any
time there is a transaction, at least two accounts will change.
3.) How will they change? Will the
account increase or decrease?
4.) Do they get a Debit or Credit?
Debits and Credits are discussed in detail in another module. T-accounts may
help in the analysis. It is a method to help your thought process without the
formality of general journal entries.
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Journalize
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The journal we will be
discussing is called the General Journal. Journals are also called the
"book of original entry" and are basically a chronological list of
transactions and the accounts that changed and what to post in them.
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Post and Balance
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Posting is the act of
transferring the information in the journal to the appropriate accounts.
Balancing is adding the increases to and subtracting the decreases from the
previous balance in an account.
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Trial Balance
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A trial balance is a
list of all the accounts and their balances. What we call Debit balances are
written in one column and Credit balances are written in one column. Each
column is totaled and compared to make sure that Debits = Credits.
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Adjustments
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Generally speaking,
adjusting entries are made at the end of a period to ensure that Revenues are
reported when earned and Expenses are reported when incurred.
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Adjusted Trial Balance
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A trial balance after
all adjustments have been: Analyzed, Journalized, Posted and the affected
accounts Balanced.
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Close
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Closing an account means
to "bring the balance to zero". We close what we call the temporary
(or nominal) accounts. They are the temporary Owner's Equity accounts -
Revenues, Expenses and Withdrawals.
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Post-closing Trial
Balance
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A trial balance after
all temporary accounts have been closed. The accounts remaining open are
called real accounts and include: Asset accounts, Liability accounts and the
Capital account. In other words, the balance sheet accounts remain open.
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Prepare Financial
Statements
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Financial Statements are
used to report the financial position and results from operating a business.
They are the Balance Sheet, the Owner's Equity Statement, the Income
Statement and the Cash Flow Statement.
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