Accounting Cycle Paper

Accounting Cycle Paper

Intermediate Financial Accounting I

The accounting cycle is a logical series of steps that accountants follow to keep necessary accounting records and prepare financial statements. The first two steps are very closely related, and are accomplished during the month as transactions occur.

The first step in the accounting cycle involves sorting business transactions into an appropriate number of debits and credits to be entered on the accounting records. The second in the accounting cycle involves recording this transaction (as debit and credit entries) in a journal for later posting to the general ledger. Posting journal entries to the general ledger, the third step in the cycle, is generally accomplished at the end of each month that is preparing trial balance. If no journal is maintained, transactions would simply be posted to the ledger as they occurred. The fourth step in the accounting cycle involves making what are called adjusting entries to the general ledger. The final step of the accounting cycle is adjusting trial balance, which means debit supposed to be equal to credit.

Organize the trial balance to make sure that debits equal credits. The trial balance is a listing of all of the ledger accounts, with debits in the left column and credits in the right column. At this point no adjusting entries have been made. The actual sum of each column is not meaningful; what is important is that the sums be equal. Note that whereas out-of-balance columns indicate a recording error, balanced columns do not guarantee that there are no errors. For example, not recording a transaction or recording it in the wrong account would not cause an imbalance. Correct any inconsistency in the trial balance. If the columns are not in balance, glance for math errors, posting errors, and recording errors. Posting errors include: posting of the wrong amount, go by over a posting, posting in the wrong column, or posting more than once.

Prepare the financial statements

The income statement is prepared from the revenue, expenses, gains, and losses. The balance sheet is prepared from the assets, liabilities, and equity accounts. The statement of retained earnings is prepared from net income and dividend information. The cash flow statement is derived from the other financial statements using either the direct or indirect method.

Prepare closing journal entries that close temporary accounts such as revenues, expenses, gains, and losses. These accounts are closed to a temporary income summary account, from which the balance is transferred to the retained earnings account (capital). Any dividend or withdrawal accounts also are closed to capital.

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