The Accounting Cycle

The Accounting Cycle

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.