Accounting Cycle Description

Accounting Cycle Description

The accounting cycle is a process used by accountants that ensure the company's financial statements and entries are accurate. These steps are followed each time the company earns revenue or makes a purchase. In order to maintain accuracy, it is crucial that each step be followed in the proper order. The number of steps in the accounting cycle can vary, but it is typically about nine stages long.

The Accounting Cycle

Accounting revolves along a company’s fiscal year cycle. There are nine distinct stages of the accounting cycle (Kimmel, Weygandt, & Kieso, 2009). Various accounting transactions happen several times each day. Cash is taken in to reconcile outstanding receivables, payments are made to supply chain partners and employees, and expenses such as interest and electricity are paid. Each one of these transactions has an effect on the organization. The first step in the cycle is to analyze the transactions to determine the accounts that are affected. Each one of these transactions is initially entered on a journal which is the second step in the cycle.

Journal entries are later carried over to the general ledger which is the center of the accounting function in an organization. According to Kimmel, Weygandt, and Kieso, “A general ledger contains all the assets, liabilities, stockholders’ equity, revenue, and expense accounts” (2009, p. 119). The general ledger not only maintains the list of accounts, but also shows the account balances. The general ledger is so important, that it will be the basis for our subsequent discussions.

The fourth step in the accounting cycle is the preparation of a trial balance. In this step the account balances from the general ledger are listed and totaled to ensure that the dollar value of debits posted during the accounting period equals the dollar value of credits (Kimmel, Weygandt, & Kieso, 2009). Once the trial balance is complete, adjusting entries are posted for deferrals and accruals. This leads to step six in which an adjusted trial balance is drafted to ensure both debits and credits remain in balance.

In the seventh step, the four financial statements are completed using the figures from the adjusted trial balance. As the accounting period comes to an end, the eighth stage of the accounting cycle dictates that closing entries be completed. Closing entries close all temporary accounts such as revenue, expenses, and dividends so that those accounts can start the new fiscal year with a zero balance. In the final step, a post-closing trial balance is prepared which lists all permanent accounts including assets, liabilities, and stockholder’s equity. Kimmel, Weygandt, and Kieso state that “The purpose of this trial balance is to prove the equality of the permanent account balances that the company carries forward into