Essay On Accounting Cycle
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The
accounting cycle consists of the following ten steps:
1. Analyze and classify events.
2. Journalizing the event.
3. Posting to the ledger.
4. Taking an unadjusted trial balance.
5. Making adjusting entries.
6. Taking an adjusted trial balance.
7. Prepare financial statements.
8. Complete closing entries and post to the ledger.
9. Take an after closing trial balance.
10. If needed, do reversing entries and post to the ledger.
1. Analyze and classify events.
2. Journalizing the event.
3. Posting to the ledger.
4. Taking an unadjusted trial balance.
5. Making adjusting entries.
6. Taking an adjusted trial balance.
7. Prepare financial statements.
8. Complete closing entries and post to the ledger.
9. Take an after closing trial balance.
10. If needed, do reversing entries and post to the ledger.
This paper will discuss these steps in detail. Because I work at home, I am not
currently involved in any of the steps of the accounting cycle. The
examples I give in this paper will be from various jobs I have held in the
past.
The fist step is to analyze and classify events. In order to enter the
transactions, the recorder must first decide what needs to be recorded. An
event should be recorded "if it is measurable, and is relevant and
reliable" (Kieso, Weygant, & Warfield, 2004). Although there are some
events that increase the assets of the business, they are not all able to be
recorded. For example, hiring a highly skilled employee can be seen as
acquiring an asset, but there no way to measure the asset, so it is not
recorded. In my experience, management usually makes these decisions. The
source documents are complied and given to the accounting department.
The second step is entering the transactions of the period in appropriate
journals. This step consists of taking the journal entries, assigning each
to an asset, liability, equity, expense or revenue account(s) to debit and
credit. This can be done by almost anyone. I have had jobs where the bookkeeper
does the journal entries and figures out which accounts are affected. I have
also had jobs where anyone from a receptionist to a staff accountant does this
step. If the person doing the journal entries does not have a background in
accounting, or is unfamiliar with which accounts are affected, the person
submitting the source documents will write down which accounts should be
debited and which should be credited. This practice makes doing the journal
entries little more than data entry, which can be done by nearly every
employee.
The third step, posting to the ledger is usually done either by a bookkeeper or
supervised by a bookkeeper. Before posting, the journal entries are reviewed by
a bookkeeper for accuracy and then for each batch, the person who entered them
is either given corrections to make or is told to post. In my experience, the
posting is done automatically by various programs that transfer the information
in the journals to the ledgers.
Upcoming topics:ACC 10707 Accounting for business
ACC 00151 Financial Accounting
Upcoming topics:ACC 10707 Accounting for business
ACC 00151 Financial Accounting
The next step is taking an unadjusted trail balance. An unadjusted trial
balance is simply a list of the accounts with the credit and debit balances
with totals. The totals from the two columns must match. If they do not mach
there is an error somewhere that needs to be uncovered. In my experience, the
trial balance is simply printed from a program and a bookkeeper reviews the
totals to be sure they match the journal entries and that all transactions have
been recorded then makes sure that the debits and credits match. If there are
errors, the bookkeeper is the one who uncovers and corrects them.
The next step is adjusting entries. Adjusting entries are can fall into four
categories: prepaid expenses, unearned revenues, accrued revenues and accrued
expenses. The adjusting entries, in my experience are always prepared and
recorded by a bookkeeper or higher. In some cases, a department head will
submit information to be recorded, but the accounting department always makes
the adjustments.
The next step is the adjusted trial balance. The concept of the adjusted trial
balance is the same as the unadjusted trial balance; the difference is that all
of the events for the period have been recorded. The adjusted trail balance is
usually done by a bookkeeper and then given to an accountant for review.
The next step is to prepare financial statements. The financial statements are
prepared from the adjusted trial balance. The financial statements are usually
prepared by an accountant, but may be prepared by a bookkeeper under the
supervision of an accountant. I have seen the financial statements done on an
excel spreadsheet and I have seen accounting software that automatically prints
them. In either case, they have always been reviewed by an accountant or member
of management. I have also never worked at a place that used worksheets. I was
first exposed to the idea in one of my earlier accounting classes and found it
very easy and less prone to error to use one than to not use one.
The next step is to close the temporary accounts. This consists of transferring
all of the income statement accounts to the income summary account. The
revenues and expenses are matched and the net result is transferred into an
equity or retained earnings account. The bookkeeper usually does this step
supervised by an accountant who will review everything before everything is
posted to the general ledger. I have personally never been involved in this
part of the accounting cycle, so although I am familiar with it form other
classes, I have no "real" experience with this step.
Reversing entries are the final step. This step is useful when an expense will
be allocated between two periods. For example, if a note payable has interest
due in the middle of the month, an adjusting entry can be made at the end of
the previous month for the full amount and then a reversing entry can be made
at the beginning of the next month in order to properly allocate the expense in
the period in which it occurred. Reversing entries are optional, except in the
case of accruals. This can be done by a bookkeeper or by an accountant.
Related topics:
Acc 301 Auditing
ACC 202 Financial accounting standards and corporate reporting
Related topics:
Acc 301 Auditing
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