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Businesses, governments, and other organizations rely on their financial accountants to maintain their accounting systems, record financial transactions, and help meet their financial reporting obligations. In an ongoing business, these activities are part of a cyclic, iterative process known as the Accounting Cycle. The Accounting Cycle is a sequence of steps or
actions with an organization's financial transactions and accounts. Each iteration of the cycle runs across a complete accounting period, usually a fiscal quarter or year. The cycle begins with the first financial transactions of the period and their entry into a journal. The cycle ends when the organization makes final end-of-period
account adjustments, closes temporary accounts, and publishes financial statements for the period just ended. In most organizations, the accounting cycle runs more or less simultaneously with a separate cycle—the budgeting and planning cycle. Activities and procedures in these two cycles are mostly
independent of each other, although some individual accountants may participate in both. Governments and regulatory agencies almost everywhere require public companies to publish financial statements—reports—for the most recently ended annual accounting period. The financial statements that are mandatory, practically everywhere, are:
Public companies must also send these reports to shareholders in an Annual Report, just before the company's annual meeting to elect directors. The financial results for the period are of keen interest to shareholder owners, directors, officers, investors, competitors, industry analysts—and the firm's employees. They view these statements as the definitive report for the company on:
Explaining Accounting Cycle in ContextSections below further define and illustrate accounting cycle concepts in the context of related terms, emphasizing two themes:
Contents
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The Accounting Cycle is All About Keeping the Accounts Each Account Has a Current BalanceThe accounting cycle is "all about" managing, updating, and reporting on the firm's accounts. The basic system building block is the account. An account in the system is merely a record of the values and value changes for a specific class of items or events. Each account has the following properties:
Exhibit 1, for instance, is an extract from a general ledger, showing the status and recent history for one account: Account 101, Cash on Hand. This form of account display, by the way, is called T-account format. Exhibit 1. A ledger T-account for account 101, Cash on Hand. This extract shows transactions and balances for one week in September. Like other asset accounts, Cash on hand is said to carry a debit (DR) balance.Figures under "Debits" and "Credits" have been posted to the T-account from the journal (see Exhibit 3, below, for sample journal transactions). Because Cash on Hand is an Asset account, it carries a so-called Debit balance. For accounts with a debit balance, debit entries increase the balance and credit entries decrease it. The Definitive Account Inventory: Chart of AccountsWhen setting up the firm's accounting system, accountants first create a definitive inventory of the system's active accounts. This inventory is mostly a simple list, known as the firm's Chart of Accounts (see Account for an example Chart of Accounts). The vast majority of firms worldwide, moreover, manage, track and update accounts using accrual accounting and a double-entry system. For this purpose, firms use five account categories.
Not surprisingly, responsibility for implementing the accounting cycle—maintaining, updating, and reporting the firm's accounts—falls primarily to the firm's accountants. The accountant's role is literally "keeper of the accounts." What Happens During Stages of the Accounting Cycle?Exhibit 2 below presents the accounting cycle as information flow, starting with transactions that impact the organization's accounts and ending with the publication of financial statements.
Accounting Cycle Step 1 Financial and Non-Financial TransactionsFor large and complex firms, events impact accounts occur frequently and more or less continuously. Exhibit 2 above suggests just a few of the many transactions that can ultimately impact accounting system accounts. For example, the accounting system is affected by every: Revenue Earned Asset purchase Expense Customer Cash Payment Borrowing Sale Closing Account Receivable Bad Debt Write Off Dividend Declared For large firms, the list of transaction types could extend to scores or hundreds of items. Accounting Cycle Step 2 Transactions Enter the JournalHistorically when accounting systems existed entirely on paper, transactions entered the records when a bookkeeper hand-wrote entries into a journal (or daybook) soon after they occurred. It was and still is a rule that "transactions" go into the journal in the order they occur, shortly after they happen. As a result, entries in the journal appear in chronological order. In this way, should anyone ask which transactions occurred on a given day, they can turn to the journal for an answer. Today, with computer-based systems, many kinds of transactions enter the journal without involving a bookkeeper or accountant. In retail shops, for instance, "Point-of-Sale" systems scan customer purchases during checkout. One touch of a cash register button print's the customer receipt and makes the appropriate accounting system journal entries at the same time. The firm can still enter other kinds of transactions into the journal manually, of course. Manuel entry may involve salespeople, bookkeepers, or accountants, using an onscreen form on the computer. Example Journal EntriesNote in the Exhibit 1 ledger extract, above, the Cash on Hand account shows a debit entry for $1200 on 6 September.
Cash on hand and Accounts receivable are both asset category accounts. As a result, Grande's total asset base does not change when the customer pays in cash. The $1,200 value merely transfers from one asset account to another. Accounting Cycle Step 3 Journal Entries Post to the LedgerEntries in the journal accumulate chronologically—in the order they occur. The ledger, however, organizes entries by account. Cycle step 3, posting, is the process of transferring journal entries to their accounts in the ledger. Exhibit 4, below, show the ledger versions of eight accounts. Note that the T-accounts in Exhibits 1 and 4 show only one week of transaction histories. The full ledger, of course, would include the entire accounting period history. The firm's General Ledger contains all active accounts from the Chart of Accounts. As a result, once journal entries transfer (post) to the ledger, anyone can ask for the current balance in any of the firm's accounts. Note that they turn to the "ledger" for an answer. Historically, with paper-based accounting systems, journal entries and ledger postings were hand-written entries made by bookkeepers and accountants. With hand-written entries, "Posting" occurred periodically, but not necessarily every day. Note, however, that computer-based accounting systems have brought the first three stages of the accounting cycle closer to being a continuously ongoing process. It is usual now for accounting system software to capture journal entries and post them to the ledger automatically and continuously. Accounting Cycle Step 4 Error Checking and Trial Balance in the Trial Balance PeriodThe accounting cycle continues until shortly before the period end. At this point, accountants create a trial balance from ledger entries. Exhibit 5 below is an excerpt from Exhibit 1, focusing on the trial balance positioning between ledger posting and the financial statement reporting. The Trial Balance Error Check: Does the Sum of Debits Equal the Sum of Credits?The name trial balance derives from one kind of error-check in this period. By the rules of double-entry accounting, the sum of all debits made during the period must equal the total of all credits. A mismatch between these sums indicates the presence of a transaction error somewhere in the system. Reconciliation and Other Error ChecksThe firm performs other kinds of error-checking during this period as well. With the reconciliation process, for instance, they ensure that the firm's bank cash account balances—as the bank reports them—agree with the firms own accounting system. And, they confirm that the firm's liability accounts for bank loans agree with the lender's account statements. Temporary Adjustment Accounts While Searching for the Error SourceWhen it becomes clear an error exists somewhere in the system, accountants may create "temporary adjusting accounts" to restore the balance between total debits and total credits immediately. The objective then is to uncover the underlying errors, correct the errors, and close temporary adjusting accounts before the trial balance period ends. When nearing the end of an accounting period, and closing the accounting cycle, the firm also tries to close other temporary accounts. A balance in an Accrued revenue account, for instance, indicates the firm has delivered purchased goods or services to a customer, but the customer, but the customer has not yet paid nor received a bill. Near the end of the trial balance period, the firm will bill the customer so that it can move the temporary Accrued revenue balance to another current assets account, such as Accounts receivable, or even Revenues received. Accounting Cycle Step 5 The Reporting PeriodThe final steps in the accounting cycle are preparing and publishing the period's financial reports. Publishing must occur after the accounting period closes, of course, because the published statements cover account activity through the final day of the period. Publishing may not happen, however, until the firm allows time for several kinds of final adjustments and auditing. Note that the time between closing the reporting period and the date the firm authorizes statements for publishing—the fifth step in the accounting cycle—is called the reporting period. In the final weeks of the accounting period, however, the firm's accountants will brief corporate officers and directors privately on the financial results they expect to publish at the end of the Reporting period. Moreover, if the actual financial results are likely to be much better, or much worse than investors and analysts are expecting, corporate officers themselves may signal a warning to the investment community and the press. The purpose is to avoid the appearance of misleading the public. In such cases, the firm has good reason to move public expectations closer to the actual results they will soon publish. Four Mandatory StatementsGovernments, regulatory bodies, and tax authorities in most countries require public companies to produce and file four mandatory statements.
Auditing Before PublishingPublic companies must obtain an auditor's opinion on their financial statements before they publish and send them to shareholders in an Annual Report, or regulatory bodies, or governments. Companies ensure impartiality by engaging independent third-party auditors—hired by the firm, but not working as employees of the audited firm. The auditor's opinion does not judge the financial position of the reporting firm. Nor does it otherwise interpret economic data. Instead, the "opinion" answers two specific questions:
Before issuing an opinion, auditors review the firm's accounting practices, financial data sources, and account transaction histories. From this, the best possible audit outcome is an auditor's opinion of Unqualified. This opinion means the auditor fully endorses a "Yes" answer to the above two questions. For more on the auditing process and possible auditing outcomes, see Auditors Opinion. What is the sequence of accounting procedures?The eight steps of the accounting cycle are as follows: identifying transactions, recording transactions in a journal, posting, the unadjusted trial balance, the worksheet, adjusting journal entries, financial statements, and closing the books.
What is the sequence of 4 steps accounting cycle?Here are the steps in the accounting cycle:
Step 1: Transactions. Step 2: Record journal entries. Step 3: Post journal entries to the general ledger (G/L) Step 4: Run unadjusted trial balance.
What are the 5 stages of the accounting process?Contents. What's the purpose of the accounting cycle?. Steps of the accounting cycle.. Step 1: Analyze and record transactions.. Step 2: Post transactions to the ledger.. Step 3: Prepare an unadjusted trial balance.. Step 4: Prepare adjusting entries at the end of the period.. Step 5: Prepare an adjusted trial balance.. What is the correct sequence for preparing the financial statements?Financial statements are compiled in a specific order because information from one statement carries over to the next statement. The trial balance is the first step in the process, followed by the adjusted trial balance, the income statement, the balance sheet and the statement of owner's equity.
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