Every business entity or organization needs to have financial records. These records help determine the financial status of the business and its durability in the market. However, these records require a set of procedures to prepare them. Therefore, what is the accounting cycle?
An accounting cycle is referred to as the accounting process. It involves a series of holistic methods of recording and processing financial transactions of an institution to its financial statements. In short, the accounting cycle procedures are to collect, process, and communicate the financial information.
The accountants use the information to prepare financial statements. However, the cycle does not end at presenting the report. This cycle involves several steps that are crucial to prepare the accounting system.
This is the first step of the accounting cycle. Accountants use business transactions, such as sales revenue, debt payoff, expenses incurred, or any purchases or acquisitions of assets. This information must be relevant and pertains to the business entity.
With all the transactions in place, proceed to the next stage. This phase involves the recording of entries in the organization's journal in chronological order. Ensure that while putting the entries, the debit and the credit columns must balance.
A ledger is a collection of accounts that shows the alterations made to every report of past transactions and their initial balances. After posting the entries in the ledgers, you can now know the balances of each account.
A trial balance is a bookkeeping report that lists all debits and credits in a double-entry account book, indicating the balances in each of an organization's general ledger account. It is typically prepared to check the equality of the debit and credits. Where errors are discovered, accountants make corrective entries to rectify or reverse the effect.
Upon detection of errors, the bookkeeper looks for places where the errors are likely to arise. They come up with corrective measures that are tracked on a worksheet. The errors may result from the incurred costs that may not have been recorded.
This may be filed after the entries have been corrected. It tests once again if the debit and credit sides are balancing after the adjustments.
Once the accounts are updated and the debit and credit sides are balancing, you can proceed to prepare the financial statement. It is the end product of the accounting system. It includes the balance sheet, income statements, and cash flow statements.Closing entries
This is the final step of the accounting cycle. It involves closure of the accounts. For instance, temporary accounts like income statements are closed to prepare the system for the next period. These types of accounts are measured in periods. However, balance sheets are not closed since they show the company's financial position at different points of time.What is Accounting Cycle Importance
With all these steps on the table, preparing a financial statement will be easy for the accountant and managers of organizations. You can seek for accounting project help now by contacting us today for prompt assistance.