The Accounting Cycle

The accounting cycle is the timeframe and process in which a company utilizes to prepare its financial statements.

The accounting cycle is completed by first reviewing all transactions that affect the business (assets, liability and owner's equity). Next make an entry of each transaction based on how it is received or disbursed (credit or debit). The third step would be to post the transaction in the general ledger account by name and date. The fourth step would be to total the amount of credit and debit in the accounts to see that it balances. The fifth step would be to journalize and post adjusting entries to bring the accounts up-to-date from the previous month. The sixth step involves identifying and preparing all documents and transaction that will go into the financial statements. The seventh step involves using all the information collected to create a statement that displays the financial condition of the company. The eighth step involves the use of the T account to determine what money will be retained or given to a shareholder. The final step in the accounting cycle involves making sure that all numbers match and that the books are balance before the next accounting cycle.

When calculating the ratio analysis for a company there are three points to consider, they are the liquidity, solvency and profitability of a company. Liquidity refers to the measure of short-term ability of the company to pay all expenses and have a steady cash flow. Solvency is used to determine whether the company can sustain monetary over a long period of time. Profitability determines the overall compensation that a company has for a specific time frame