The Accounting Cycle
Length: 977 words (2.8 double-spaced pages)
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The accounting cycle consists of the following ten steps:
1. Analyze and classify events.
2. Journalizing the event.
3. Posting to the ledger.
4. Taking an unadjusted trial balance.
5. Making adjusting entries.
6. Taking an adjusted trial balance.
7. Prepare financial statements.
8. Complete closing entries and post to the ledger.
9. Take an after closing trial balance.
10. If needed, do reversing entries and post to the ledger.
This paper will discuss these steps in detail. Because I work at home, I am not currently involved in any of the steps of the accounting cycle. The examples I give in this paper will be from various jobs I have held in the past.
The fist step is to analyze and classify events. In order to enter the transactions, the recorder must first decide what needs to be recorded. An event should be recorded "if it is measurable, and is relevant and reliable" (Kieso, Weygant, & Warfield, 2004). Although there are some events that increase the assets of the business, they are not all able to be recorded. For example, hiring a highly skilled employee can be seen as acquiring an asset, but there no way to measure the asset, so it is not recorded. In my experience, management usually makes these decisions. The source documents are complied and given to the accounting department.
The second step is entering the transactions of the period in appropriate journals. This step consists of taking the journal entries, assigning each to an asset, liability, equity, expense or revenue account(s) to debit and credit. This can be done by almost anyone. I have had jobs where the bookkeeper does the journal entries and figures out which accounts are affected. I have also had jobs where anyone from a receptionist to a staff accountant does this step. If the person doing the journal entries does not have a background in accounting, or is unfamiliar with which accounts are affected, the person submitting the source documents will write down which accounts should be debited and which should be credited. This practice makes doing the journal entries little more than data entry, which can be done by nearly every employee.
The third step, posting to the ledger is usually done either by a bookkeeper or supervised by a bookkeeper. Before posting, the journal entries are reviewed by a bookkeeper for accuracy and then for each batch, the person who entered them is either given corrections to make or is told to post.
In my experience, the posting is done automatically by various programs that transfer the information in the journals to the ledgers.
The next step is taking an unadjusted trail balance. An unadjusted trial balance is simply a list of the accounts with the credit and debit balances with totals. The totals from the two columns must match. If they do not mach there is an error somewhere that needs to be uncovered. In my experience, the trial balance is simply printed from a program and a bookkeeper reviews the totals to be sure they match the journal entries and that all transactions have been recorded then makes sure that the debits and credits match. If there are errors, the bookkeeper is the one who uncovers and corrects them.
The next step is adjusting entries. Adjusting entries are can fall into four categories: prepaid expenses, unearned revenues, accrued revenues and accrued expenses. The adjusting entries, in my experience are always prepared and recorded by a bookkeeper or higher. In some cases, a department head will submit information to be recorded, but the accounting department always makes the adjustments.
The next step is the adjusted trial balance. The concept of the adjusted trial balance is the same as the unadjusted trial balance; the difference is that all of the events for the period have been recorded. The adjusted trail balance is usually done by a bookkeeper and then given to an accountant for review.
The next step is to prepare financial statements. The financial statements are prepared from the adjusted trial balance. The financial statements are usually prepared by an accountant, but may be prepared by a bookkeeper under the supervision of an accountant. I have seen the financial statements done on an excel spreadsheet and I have seen accounting software that automatically prints them. In either case, they have always been reviewed by an accountant or member of management. I have also never worked at a place that used worksheets. I was first exposed to the idea in one of my earlier accounting classes and found it very easy and less prone to error to use one than to not use one.
The next step is to close the temporary accounts. This consists of transferring all of the income statement accounts to the income summary account. The revenues and expenses are matched and the net result is transferred into an equity or retained earnings account. The bookkeeper usually does this step supervised by an accountant who will review everything before everything is posted to the general ledger. I have personally never been involved in this part of the accounting cycle, so although I am familiar with it form other classes, I have no "real" experience with this step.
Reversing entries are the final step. This step is useful when an expense will be allocated between two periods. For example, if a note payable has interest due in the middle of the month, an adjusting entry can be made at the end of the previous month for the full amount and then a reversing entry can be made at the beginning of the next month in order to properly allocate the expense in the period in which it occurred. Reversing entries are optional, except in the case of accruals. This can be done by a bookkeeper or by an accountant.
Kieso, D. E., Weygant, J. J., & Warfield, T.D. (2004).
Intermediate Accounting (e-book version). Hoboken, NJ:
John Wiley and Sons, Inc. Retrieved January 3, 2006 from https://mycampus.phoenix.edu/secure/resource/resource.asp