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The Accounting Cycle Essay

1542 words - 7 pages

Any time a business purchases an item or receives money from another business, a transaction takes place. Over time, the invoices and receipts can build up and become rather consuming. In order to keep all of the finances in order, accountants use a process to record all of this information. This process is known as the accounting cycle. As with most cycles, the accounting cycle is continuous. This means that when an accountant reaches the last step, the cycle starts all over. There are a total of nine steps in the accounting cycle, along with two steps that are optional for businesses. This paper will walk you through each step in the accounting process to give you a better understanding of ...view middle of the document...

Once all of the transactions for a single account have been listed, you can balance the T account out. To obtain the balance for the T account, you will add up each side and subtract the smaller side from the larger. The difference between the two sides will be your balance and will be placed on the side with the larger sum. Now, you are ready to move on to your next step in the cycle.
The next step is to prepare a trial balance. This step is used to verify that all of your debits balance out with your credits. Each general ledger account is listed by the account number as well as the account name. The balance from your T account in the previous step is also recorded. After all of your accounts are listed (assets, liabilities, owner’s equity, revenue, and expenses), you will again add up the debit and credit sides. These two sides should be equal. If they do not equal, there is probably an error in the accounting process thus far. If they are equal, then you are ready to move on to step five in the cycle.
This next step is to journalize and post adjusting entries. Occasionally, the revenue and expense accounts will need to be adjusted to make them current for the accounting period when they actually occurred. Each adjusting entry is recorded in the journal and then posted to the general ledger the same way as it was in step three. For example, if you have revenue that was earned but not billed, you would debit your accounts receivable and credit your service revenue. After each adjustment has been listed, the debits and credits will be totaled once again to make sure they balance.
If your adjusting entries balance out, you can then prepare an adjusted trial balance, which is step six in the accounting cycle. Each account that did not have an adjustment will be carried over into the adjusted trial balance. The accounts that had an adjustment will need to be corrected before transferring over. Using the example from above, you would take your balance of your accounts receivable from the trial balance and adjust it accordingly with the debit from the adjustment. If the beginning balance was a debit and the adjustment is a debit, then you would add the adjustment. You would then do the same thing for the service revenue. Once the adjusted trial balance is completed, you will total your debits and credits to ensure that they are still equal. Then, you are ready for step seven.
The seventh step in the accounting cycle is to prepare your financial statements. A set of financial statements include an income statement, a statement of owner’s equity, a balance sheet, and a statement of cash flows. The financial statements must be prepared in this order because the information from one statement is used on the next one in the process. To prepare an income statement, the revenues are listed first followed by the expenses. You will subtract your expenses from your revenue and this show your net income or net loss. If the balance is positive, it is net...

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