What is the accounting cycle?
The accounting cycle is often described as a process that includes the following steps: identifying, collecting and analyzing documents and transactions, recording the transactions in journals, posting the journalized amounts to accounts in the general and subsidiary ledgers, preparing an unadjusted trial balance, perhaps preparing a worksheet, determining and recording adjusting entries, preparing an adjusted trial balance, preparing the financial statements, recording and posting closing entries, preparing a post-closing trial balance, and perhaps recording reversing entries.
Cycle and steps seem to be a carryover from the days of manual bookkeeping and accounting when transactions were first written into journals. In a separate step the amounts in the journal were posted to accounts. At the end of each month, the remaining steps had to take place in order to get the monthly, manually-prepared financial statements.
Today, most companies use accounting software that processes many of these steps simultaneously. The speed and accuracy of the software reduces the accountant's need for a worksheet containing the unadjusted trial balance, adjusting entries, and the adjusted trial balance. The accountant can enter the adjusting entries into the software and can obtain the complete financial statements by simply selecting the reports from a menu. After reviewing the financial statements, the accountant can make additional adjustments and almost immediately obtain the revised reports. The software will also prepare, record, and post the closing entries.
3. The Accounting Cycle
• Accounting procedures are performed over a
period of time.
• Procedures are performed in a definite order
in the accounting cycle.
• The accounting period is a period of time
covered by the income statement.
• Usually this is a twelve month period.
• The accounting cycle has sequential steps to
be performed again each year.
4. The Accounting Cycle
• Accounting is the process that...
– analyzes,
– records,
– classifies,
– summarizes,
– reports, and...
– interprets.
5. The Accounting Cycle
A sole proprietorship:
– has one owner
– begins with a monthly accounting cycle
– owner has a capital and withdrawals account
6. Business Organizations
• All three types of business entities use the
same basic accounting system.
Sole proprietorship
Partnerships
Corporations
7. • The Accounting Cycle:
1 Analyzing
2 Recording transactions – journalizing
3 Posting to the ledger accounts
4 Preparing the trial balance
• The accounting cycle has some variations in a
computerized accounting system.
8. What is the general journal?
• It is the book of original entry.
• Transactions are written in a journal in
chronological order.
• The format of the journal is important.
• Journalizing is the process of entering
information as debits and credits to the
correct accounts.
9. What is the general ledger?
• It is the book of final entry.
• The information from the journal is
transferred to the ledger in the posting
process.
• Debits and credits in the journal remain
exactly the same when posted to the accounts
in the ledger.
10. What is the chart of accounts?
• It is the list of accounts used by a business.
• Each business entity has its unique chart of
accounts.
• Every chart of accounts has the same
numbered account categories:
– Assets, Liabilities, Owner’s Equity
– Revenues, Expenses
11. Journalizing
• Debits are always recorded first.
• Indent, then record the credit below the
debit.
• A short explanation is included on the second
line.
• Leave a space between journal entries.
12. • Debits must always equal credits.
• Amounts incurred for items that benefit
future accounting periods are recorded as
assets.
• What are some examples?
– prepaid rent
– prepaid insurance
13. • Amounts for items used (expenses incurred) in
the current accounting period are recorded as
expenses.
• What are some examples?
– supplies used
– rent for the month
– expired insurance
14. • Amounts are recorded as revenue on the date
in which they are earned.
• When are revenues earned?
• When services are performed, not necessarily
when cash is paid.
15. Posting
• All transactions are recorded in the journal,
then amounts are copied to the ledger
accounts named on the journal line.
• Once the amounts are entered into the
accounts, a posting reference (PR) must be
entered in the journal.
• New balances are computed in the running
ledger accounts.
17. Example
Journal Page 1
Date Account and
Explanation Post Ref. debit credit
Initial investment
June 1 Cash 1000 5,000
Clara J. Capital 3010 5,000
18. Example
Journal Page 1
Date Account and
Explanation Post Ref. debit credit
Paid phone bill
July 3 Phone Expense 5040 155
Accounts Payable 2000 155
19. Example
Journal Page 1
Date Account and
Explanation Post Ref. debit credit
Paid insurance bill
July 6 Insurance Expense 5060 150
Cash 1000 150
20. Example
Journal Page 1
Date Account and
Explanation Post Ref. debit credit
Paid Accounts Payable
July 8 Accounts Payable 2000 200
Cash 1000 200
21. Example
Journal Page 1
Date Account and
Explanation Post Ref. debit credit
Performed Services
July 8 Accounts Receivable 1020 850
Service Revenue 4000 850
22. Preparing the Trial Balance
• The trial balance lists the accounts that have
balances in the same order as they appear in
the chart of accounts.
• The trial balance will show if debits/credits
have been interchanged, or if amounts have
been transposed, or if a debit/credit was
omitted or recorded twice.
23. • Some errors do not show, such as omissions
or recording to the wrong account.
• Corrections before posting are made in the
journal.
• An audit trail must be left.
• Do not erase – cross out errors and enter
corrections.
24. • What about corrections after posting?
• This means that errors are also in the ledger
accounts.
• Cross out incorrect amounts, change to
corrected amounts, and record balance
changes.