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THE 9 STEPS IN THE ACCOUNTING CYCLE
The accounting process includes the recording and processing of the accounting transactions of a company. It starts when a transaction happens and ends when it is entered into the financial statements. All businesses are required to maintain proper documentation of its financial records.
THE ACCOUNTING CYCLE
The emergence of accounting software has made it easy to track the accounting cycle, keeping in mind that different processes such as accounts receivable have their own unique modules. Nonetheless, it is the point of entry that matters. The software will only perform balancing checks, but it will hardly recognize a wrong entry.
Step 1 - Analyzing Transactions
Before recording transactions that reflect the business events, it is important to analyze them to determine to what account to code them, and where, what sub-ledger, to record them. In other worlds, all financial transactions that can me measured and are material to the business need to be recorded as sales generated, costs for those sales, cash in bank increases, decreases, etc.
Step 2 - Recording all Transactions
After carefully analyzing the nature of a transactions, it needs to be recorded in the proper sub-ledger; it's important to record the transaction according to its nature in the correct journals to avoid errors.
Each journal entry will consist of amounts that are debits and credits, the transaction date, and the explanation of the transaction.
Step 3 - Posting from the sub-journals to the General Journal known as the General Ledger
Posting monthly end transactions from different journals or sub-journals to the general ledger is gathering all transactions into one record. Sub-journals or sub-ledgers could be kept for Accounts Receivable, Accounts Payable, Inventory, Purchases, Sales, etc. In the General Journal or Ledger, the company has a complete record of all the accounting transactions. The information that is recorded in the general ledger is what is used to create a company’s financial statements.
Step 4 - Creating a month-end Trial Balance before reconciling accounts
The trial balance is a list of the company’s accounts and balances before reconciling entries have been made in order to create the financial statements. Debit balances are listed in the left column, while credit balances are in the right. The totals of these columns must match.
Step 5 - Preparing for Reconciling Accounts
Account reconciliations are done at the end of an accounting period to reflect the final balances of the general ledger accounts. These reconciliations assure the results reflect the financial position of the business. Reconciliations take into account the matching principle of cost and revenue. The purpose of this principle is to recognize the transactions that generated revenues and the cost attributable to these transactions.
An adjusted trial balance only leaves relevant accounts and makes way for the financial statements.
Step 6 - Preparing a Closing Trial Balance
The Closing trial balance shows the balance of all the accounts after an accounting period has ended. The results show the effects of the business transactions conducted during the last accounting period.
Step 7 - Preparing the Financial Statements which reflect the state of the company business
The Financial Statements are records of a company’s financial condition that reflect the business' potentialities. The entire journal entry process, from the data entry to the reconciliation of accounts, ends in the preparation of these financial statement.
A typical organization has three primary financial statements. First, there is the statement of comprehensive incomes, also known as the profit and loss account, which shows the company’s revenue and expenses. Second, the balance sheet, also called the statement of financial position, which contains all liabilities and assets of the company. This is where you will have the company’s capitalization. The third primary statement is the statement of cash flows, which shows your company’s liquidity and shareholding.
Step 8 - Closing Entries
At the end of a month or fiscal year, a company will complete its accounting cycle. Temporary balances are reduced to zero in order to prepare the accounts for the following cycle's transactions. The balances at the month-end or year-end will form the basis for the next fiscal year, as the opening balances.
Step 9 - Closing the Accounting cycle.
When this is done, all your income and expense accounts will become part of your Balance Sheet Statement which reflects the state, health , of your business. The Balance sheets contains the "permanent" accounts, which are: assets, liabilities, and owners’ equity.
When the Accounting cycle is closed, a new one starts.
Timely keeping your books in good shape will indicate the life, health, of your business so you can make sound decisions. It will give you peace of mind.
Monthly Accounting with Financial Statements
(with no employees)
Monthly Accounting, payroll (up to 4 employees), and Financial Statements.
New Corporations & LLC's
$99 plus filing fees.
No fee if you decide to retain our firm to service your account.
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