Acc Cycle

Accounting
Cycle
Financial Accounting and Reporting
● The accounting cycle, also commonly referred to as accounting process, is a series of

procedures in the collection, processing, and communication of financial
information.
● Financial information is presented in reports called financial statements. But before
they can be prepared, accountants need to gather information about business
transactions, then record and collate them to come up with the values to be
presented in the reports.
● The cycle does not end with the presentation of financial statements. Subsequent
steps are needed to be done to prepare the accounting system for the next cycle.
10 Steps of the
Accounting Cycle
1
10 Steps of the Accounting Cycle
1. Identifying and Analyzing Business Transactions
▪ The accounting process starts with identifying and analyzing business transactions
and events.
▪ For example, a personal loan made by the owner that does not have anything to do
with the business entity is not accounted for.
▪ The transactions identified are then analyzed to determine the accounts affected
and the amounts to be recorded.
▪ The first step includes the preparation of business documents, or source documents.
A business document serves as basis for recording a transaction.
Not all transactions and events are entered into the accounting system. Only those that
pertain to the business entity are included in the process.
2. Recording in the Journals

▪ A journal is a book – paper or electronic – in which transactions are recorded.
Business transactions are recorded using the double-entry bookkeeping system.
They are recorded in journal entries containing at least two accounts (one debited
and one credited).
▪ Transactions are recorded in chronological order and as they occur.
▪ Journals are also known as Books of Original Entry.
3. Posting to the Ledger

▪ Also known as Books of Final Entry, the ledger is a collection of accounts that shows
the changes made to each account as a result of past transactions, and their current
balances.
▪ After the posting all transactions to the ledger, the balances of each account can
now be determined.
▪ For example, all journal entry debits and credits made to Cash would be transferred
into the Cash account in the ledger. We will be able to calculate the increases and
decreases in cash; thus, the ending balance of Cash can be determined.
4. Preparation of Unadjusted Trial Balance

▪ A trial balance is prepared to test the equality of the debits and credits. All account
balances are extracted from the ledger and arranged in one report. Afterwards, all
debit balances are added. All credit balances are also added. Total debits should be
equal to total credits.
▪ When errors are discovered, correcting entries are made to rectify them or reverse
their effect. Take note however that the purpose of a trial balance is only test the
equality of total debits and total credits and not to determine the correctness of
accounting records.
Some errors could exist even if debits are equal to credits, such as double posting or failure
to record a transaction.
5. Recording Adjusting Entries

▪ Adjusting entries are prepared as an application of the accrual basis of accounting. At
the end of the accounting period, some expenses may have been incurred but not
yet recorded in the journals. Some income may have been earned but not entered in
the books.
▪ Adjusting entries are prepared to update the accounts before they are summarized
in the financial statements.
▪ Adjusting entries are made for accrual of income, accrual of expenses,
deferrals (income method or liability method), prepayments (asset method or
expense method), depreciation, and allowances.
6. Preparation of Adjusted Trial Balance

▪ An adjusted trial balance may be prepared after adjusting entries are made and
before the financial statements are prepared. This is to test if the debits are equal to
credits after adjusting entries are made.
7. Financial Statements
▪ When the accounts are already up-to-date and equality between the debits and
credits have been tested, the financial statements can now be prepared. The
financial statements are the end-products of an accounting system.
▪ A complete set of financial statements is made up of:
1. Statement of Comprehensive Income (Income Statement and Other
Comprehensive Income),
2. Statement of Changes in Equity,
3. Statement of Financial Position or Balance Sheet,
4. Statement of Cash Flows, and
5. Notes to Financial Statements.
8. Closing Entries
▪ Temporary or nominal accounts, i.e. income statement accounts, are closed to
prepare the system for the next accounting period. Temporary accounts
include income, expense, and withdrawal accounts. These items are measured
periodically.
▪ The accounts are closed to a summary account (usually, Income Summary) and then
closed further to the appropriate capital account. Take note that closing entries are
made only for temporary accounts. Real or permanent accounts, i.e. balance sheet
accounts, are not closed.
9. Post-Closing Trial Balance

● In the accounting cycle, the last step is to prepare a post-closing trial balance. It is
prepared to test the equality of debits and credits after closing entries are made.
Since temporary accounts are already closed at this point, the post-closing trial
balance contains real accounts only.
10. Reversing Entries: Optional step at the beginning of the new accounting period
▪ Reversing entries are optional. They are prepared at the beginning of the new
accounting period to facilitate a smoother and more consistent recording process.
▪ In this step, the adjusting entries made for accrual of income, accrual of expenses,
deferrals under the income method, and prepayments under the expense method
are reversed.

Acc Cycle

Uploaded by

Copyright:

Available Formats

Acc Cycle

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Acc Cycle

Uploaded by

Copyright:

Available Formats

Accounting

● The accounting cycle, also commonly referred to as accounting process, is a series of

2. Recording in the Journals

3. Posting to the Ledger

4. Preparation of Unadjusted Trial Balance

5. Recording Adjusting Entries

6. Preparation of Adjusted Trial Balance

9. Post-Closing Trial Balance

You might also like