Question

Explain (give some detail, not just the necessary functions) of the nine (9) steps required to complete the accounting cycle, and what each step is designed to accomplish. Provide one Reference not Wiki.

Answer 1

9 steps to complete the Accounting Cycle :

1. Identifying and Analyzing Business Transactions:

Business Transactions are analyzed whether they actual Pertain to business and whether they should be accounted for. For example Personal Transactions may be done by the owner which has nothing to do with business. After analyses the Proper head of accounts for the transaction are determined and along with the preparation of source of document,a  business document serves as basis for recording a transaction.

2. Recording in the Journals

A journal is a book i.e it can be paper or electronic form in which transactions are recorded.

Business transactions are recorded using the double-entry system of accounting .They are recorded in journal entries containing at two accounts i.e Every Debit should have a credit and vice versa.

Journals are also known has Books of Orginal Entry.

3. Posting to the Ledger

The ledger is a collection of accounts that shows a summary of the changes made to each account as a result of past transactions, and also the current balances.

After the posting of all transactions to their Respective ledgers, the balances of each account can now be determined as regards to adjustments to be made if any.

4. Unadjusted Trial Balance

A trial balance is prepared to test whether the debits and credits are equal in total. All account balances from the ledger are taken and arranged in one report. All debit balances & credit balances are added to check whether ,Total debits equal to total credits.

When errors are discovered, Adjustment entries are made to rectify the errors or reverse their effect , also has regards to errors there are various types of errors some of which may not affect the totals.

5. Adjustment Entries

Adjustment entries are an application of the accrual basis of accounting.

At the end of the accounting period, some expenses may have been incurred but not yet recorded . Some income may have been earned but not entered in the books.

Adjustment  entries are prepared to correct  the accounts before preparation of  financial statements.

6. Adjusted Trial Balance

An adjusted trial balance is  prepared after giving effect to the  adjustments entries and before the financial statements are prepared. This is to verify whether  if the debits are equal to credits after adjusting entries are made.

7. Financial Statements

When the accounts are updated and the trial balance tallies such that there is equality between the debits and credits , the financial statements can now be prepared. The financial statements are the end step of an accounting.

Financial statements are  made up of: (1) Statement of Comprehensive Income (2) Statement of Changes in Equity, (3) Statement of Financial Position or Balance Sheet, (4) Statement of Cash Flows, and (5) Notes to Financial Statements.

8. Closing Entries

Temporary or nominal accounts  are closed to a summary account (usually, Income Summary) and then further the balances are transferred to the appropriate capital account. Ex Profit /loss from income summary is transferred to Retained Earnings.

9. Post-Closing Trial Balance

In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to check whether the trial balance tallies  after closing entries are made. All temporary accounts are already closed by this point, the post-closing trial balance contains real accounts.