The accounting cycle, when followed properly, is a process that provides an accurate balance in a company’s finances. This is a 10-step cycle that involves analyzing transactions and recording of the inputs and outputs of a company’s general ledger. An accurate accounting cycle is fundamental in showing the company’s finances and income generated. As stated previously, the accounting cycle is a 10-step process that starts with analyzing and recording transactions and finishes with a post-closing trial balance. (Warren, Reeve, & Duchac, 2017).
The first step in the accounting cycle is to evaluate and report transactions into the journal. By deciding on the which type account will be affected, noticing a flocculation in increases or decreases, and recording the transaction in the journal, the company is able to analyze the transactions. By using the company’s chart of accounts, a person can determine if an account is an asset, retained earnings, liability, or common stock. A double -entry accounting system is used for this process (Warren, Reeve, & Duchac, 2017).
Step two in the accounting cycle is remitting transactions in the ledger. Postings are listed in the order that they happen and are either placed on the left side as a debit or on the right side in the credit column of the account.
Step three is preparing an unadjusted trial balance. An unadjusted trial balance is used to see if there are errors when documenting the transactions. When balancing the accounts, both the credits and debits should equal the same amount at the end.
If they are different, then there is a mistake on the ledger that needs to be fixed. (“Accounting Cycle – 10 Steps of Accounting Process Explained,” 2018).
Step four is assembling and analyzing adjustment data. There are many different accounts that will need to be adjusted before a financial statement can be made. For example, line items such as accrued revenue, prepaid expenses, accrued expenses and unearned revenue, need to be adjusted based on the dates that they fall.
Step five includes preparing an end-of-period spreadsheet. Although this is not an obligatory step, it is a good way to show how the accounting information transitions from the unadjusted trial balance to the adjusted trial balance. (Warren, Reeve, & Duchac, 2017).
Step six in the accounting cycle is journalizing and posting adjusted entries. Each adjusted entry affects both an income statement account and a balance statement account.
In step seven, the adjusted trial balance is prepared that zeros out the credit and debit balances. If these numbers are not equal, then the sheet does not balance and their in an error on the statement. (“Accounting Cycle – 10 Steps of Accounting Process Explained,” 2018). It is important to note that this is only an internal form to help identify mistakes and is not part of the income statement.
Step eight is preparing the financial statements. This is one of the most important steps in the accounting cycle and shows the income, balanced, and retained earnings statement the company. This will also show the net income or loss of a company.
Step nine includes journalizing and posting the closing entries. There are four required closing entries for this step: debiting each revenue account and crediting the income statement, crediting the expense account and debiting the income summary, debit the income summary and credit the retained earnings statement, and finally, debit the retained earnings account for the balance of the dividends account, and credit the dividends account.
The final step in the accounting cycle is step ten, preparing the post-closing trial balance. This step is used to double-check the ledger balance at the end of the period. The final products of an accounting cycle include the income statements, balance sheets, and retained earnings. The three forms together allow for a business to see all financial aspects of their company. They can show the day-to day flow of the company and can help determine the net income or net loss. They are also able to give insight and benchmarking tools to Operations Managers. This can show them if anything needs to be adjusted with their financial planning. Missing a step in the accounting cycle can throw the entire cycle off-balance because each step in the cycle — and the accuracy of each step — is sequentially significant. (Lohrey, n.d.) Both large and small companies use the accounting cycle to keep their balances in check and ensure that their companies are profitable. By following the accounting cycle, is the best way to keep your business transactions up-to-date.