Aaccounting Cycle

Aaccounting Cycle

The cycle does not end with the presentation of financial statements. Several steps are needed to be done to prepare the accounting system for the next cycle. Accounting Cycle Steps 1 . Identifying and Analyzing Business Transactions The accounting process starts with identifying and analyzing business transactions and events. Not all transactions and events are entered into the accounting system. Only those that pertain to the business entity are included in the process. For example, a loan made by the owner in his name that does to have anything to do with the entity is not accounted for.

The transactions identified are then analyzed to determine the accounts affected and the amounts to be recorded. The first step includes the preparation of business documents, or source documents. A business document serves as basis for recording a transaction. 2. Recording in the Journals A journal is a book -? paper or electronic – in which transactions are recorded. Business transactions are recorded using the double-entry bookkeeping system. They are recorded in journal entries containing at least TV accounts one debited and one credited).

To simplify the recording process, special journals are often used for transactions that recur frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record those that cannot be entered in the special books. Transactions are recorded in chronological order and as they occur. Hence, journals are also known as Books of Original Entry. 3. Posting to the Ledger Also known as Books of Final Entry, a ledger is a collection of accounts that shows the changes made to each account as a result of past transactions, and heir current balances.

This is the core of the classifying phase. After the posting process, the balances of each account can now be determined. For example, all journal entries made to Cash would be transferred into the Cash account in the ledger. Increases and decreases in cash will be entered into one ledger account. Thus, the ending balance of Cash can be determined. 4. Unadjusted Trial Balance A trial balance is prepared to test the equality Of the debits and credits. All account balances are extracted from the ledger and arranged in one report.

Afterwards, all debit balances are added. All credit balances are also added. Total debits should be equal to total credits. When errors are discovered, correcting entries are made to rectify them or reverse their effect. Take note however that the purpose of a trial balance is only test the equality of total debits and total credits and not to determine the correctness of accounting records. Some errors could exist even if debits are equal to credits, such as double posting or failure to record a transaction.

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