Scribd
Upload
5 views

Module 2 - Objective 5 - The Steps in Accounting Cycle

The accounting cycle is a systematic process that ensures accurate recording and reporting of a business's financial transactions, starting from transaction identification to the preparation of financial statements. It consists of ten steps, including journalizing transactions, posting to ledgers, preparing trial balances, and closing entries. This cycle is crucial for providing a clear financial picture, aiding decision-making, and ensuring compliance with regulations.

Uploaded by

Antonia Pierre
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
5 views

Module 2 - Objective 5 - The Steps in Accounting Cycle

The accounting cycle is a systematic process that ensures accurate recording and reporting of a business's financial transactions, starting from transaction identification to the preparation of financial statements. It consists of ten steps, including journalizing transactions, posting to ledgers, preparing trial balances, and closing entries. This cycle is crucial for providing a clear financial picture, aiding decision-making, and ensuring compliance with regulations.

Uploaded by

Antonia Pierre
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

CAPE Entrepreneurship Unit 2

Module 2 – Objective 5
Lecture Notes – Steps in the Accounting Cycle

The Accounting Cycle


- The accounting cycle is a series of steps that is followed to ensure that the records of a
business are true and fair. Each business transaction goes through these steps. The series of
steps begin when a transaction occurs and end with its inclusion in the financial statements.

- The accounting cycle is a collective process of identifying, analyzing, and recording the
accounting events of a company.

Why is the Accounting Cycle Important?


The accounting cycle is important because it provides a structured method to accurately record
and report all financial transactions within a specific accounting period, ensuring a clear picture of
a company's financial health, enabling informed decision-making, and facilitating compliance with
regulations by providing reliable financial statements to stakeholders like investors and lenders.

Diagram of the Accounting Cycle

The steps in the accounting cycle are as follows:


1. identify and analyze transactions.
2. record transactions to journal
3. post journal information to the ledger
4. prepare an adjusted trial balance
5. adjusting entries
6. prepare adjusted trial balance
7. prepare financial statements
8. close the entries.
9. prepare post-closing trial balance
10. reversing entries (optional)

Explain the steps in the Accounting Cycle

Step 1 - Collecting and analyzing data from source documents.


When a transaction occurs, a document is produced. Most of the time, these documents are external
to the business (e.g. purchase orders, sales slips, etc.). However, they can also be internal
documents, such as inter-office sales, cheques, bills from providers, etc. These documents are
referred to as source documents. Some additional examples of source documents include:
• The receipt you get when you purchase something at the store.
• Interest you earned on your savings account which is documented in your monthly bank
statement.
• The monthly electric utility bill that comes in the mail.
• The telephone bill.
• Invoices from other service providers, contractors, etc.

Step 2 – Journalizing transactions.


The source documents are recorded in a Journal. This is also known as a book of first entry. The
journal records both sides of the transaction recorded in the source document. These write-ups are
known as Journal entries. The Journal entries are then transferred to a Ledger. The group of
accounts (described earlier) is called ledger. A ledger is also known as a book of accounts. The
purpose of a Ledger is to bring together all of the transactions for a similar activity. For example,
if a business has one bank account, then all transactions that include cash would then be maintained
in the Cash Ledger.

Step 3 – Post to the Ledgers


This process of transferring the values is known as a posting. Once the entries have all been
posted, the Ledger accounts are added up in a process called Balancing. Balancing implies that
the sum of all Debits equals the sum of all Credits.

Step 4 – Unadjusted Trial Balance.


A particular working document called an unadjusted trial balance is created. This lists all the
balances from all the accounts in the Ledger. Notice that the values are not posted to the trial
balance, they are merely copied. At this point, accounting happens. The accountant produces a
number of adjustments, which make sure that the values comply with accounting principles. These
values (such as depreciation of equipment) are then passed through the accounting system resulting
in an adjusted trial balance. This process continues until the accountant is satisfied.

Steps 5 – Prepare adjustments.


Period-end adjustments (usually quarterly) are required to bring accounts to their proper balances
after considering transactions and/or events not yet recorded. Under accrual accounting, revenue
is recorded when earned and expenses when they are incurred. An entry may be required at the
end of the period to record revenue that has been earned but not yet recorded on the books.
Similarly, an adjustment may be required to record expense that may have been incurred but not
yet recorded.

Step 6 – Prepare an adjusted trial balance.


This step is similar to the preparation of the unadjusted trial balance, but this time the adjusting
entries are included. Correction of any errors must be made.

Step 7 - Prepare Financial Statements.


Financial statements are drawn from the trial balance and are presented in the following forms:
• Income statement: prepared from revenue, expenses, gains and losses
• Balance sheet: prepared from assets, liabilities and equity accounts
• Statement of retained earnings: prepared from net income and dividend information
• Cash flow statement: derived from the other financial statement using either the direct or indirect
method.
Finally, all the revenue and expense accounts are closed.

Step 8 – Closing entries.


Revenues and expenses are accumulated and reported by period, monthly, quarterly, or yearly. To
prevent them not being added to or co-mingled with revenues and expenses of another period, they
need to be closed outthat is, given zero balances at the end of each period. Their net balances,
which represent the income or loss for the period, are transferred into owners’ equity. Once revenue
and expense accounts are closed, the only accounts that have balances are the asset, liability, and
owners’ equity accounts. These balances are carried forward to the next period.

Step 9 – Prepare post-closing trial balance.


The purpose of this final step is two-fold: to determine that all revenue and expense accounts
have been closed properly and to test the equality of debit and credit balances of all the balance
sheet accounts, that is, assets, liabilities and owners’ equity.

You might also like