The Accounting Cycle

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		DESCRIPTION
Transaction		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.
Business Paper or Computer Record		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.
Analyze		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.
Journalize		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.
Post and Balance		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.
Trial Balance		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.
Adjustments		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.
Adjusted Trial Balance		A trial balance after all adjustments have been: Analyzed, Journalized, Posted and the affected accounts Balanced.
Close		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.
Post-closing Trial Balance		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.
Prepare Financial Statements		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.