Businesses, Transactions Take Place. Transactions

¶ … businesses, transactions take place. Transactions vary from such things as sales, expenses, wages, purchases, and receivables. These transactions are maintained in various journals and ledgers and tell the financial story of the business. The process of maintaining this financial story is called the Accounting Cycle. Evaluation There are ten steps involved in completing the accounting cycle. They are as follows: "(1) Transactions are analyzed and recorded in the journal. (2) Transactions are posted to the ledger. (3) an unadjusted trial balance is prepared. (4) Adjustment data are assembled and analyzed.

(5) an optional end-of-period spreadsheet is prepared. (6) Adjusting entries are journalized and posted to the ledger. (7) an adjusted trial balance is prepared. (8) Financial statements are prepared. (9) Closing entries and journalized and posted to the leger. (10) a post-closing trial balance is prepared." (Warren, Reeve, & Duchac (2012) pg. 162) The accounting cycle begins with analyzing and recording transactions. The bookkeeper, for example, would review the invoices, purchase orders, bank statements, etc. After the transactions have been analyzed they are now ready to be posted to the journal using the double-entry accounting system.

The double-entry accounting system means that the transactions are recorded in at least two or more accounts so that the debits and credits equal. After the transactions are recorded in the journal they are now ready to be posted to the ledger. A ledger is a book which contains the businesses individual accounts in it. Posting is simply transferring the data from the journal to the proper accounts in the ledger. To verify all the debits and credits equal after posting, an unadjusted trial balance is prepared.

This is a list of all the accounts in the ledger and their balances at any given time. The next step in the accounting cycle would be to analyze the adjustment data. Adjustments are made to bring asset and liability accounts balances to their proper amounts and update the corresponding revenue and expense accounts. At this point, and optional end-of-period spreadsheet may be prepared. This is used to show the effects of the adjusting entries to the unadjusted trial balance.

In the next step, the adjusting entries are recorded in the journal and then posted to the ledger. After all the adjusting entries have been posted, an adjusted trial balance is prepared. Again, this is prepared to verify that all of the debits and credits equal. Once this has been completed, the next step would be to prepare the financial statements. Information from the adjusted trial balance is used to prepare an income statement, a statement of owner's equity, and a balance sheet.

An income statement is a summary of the revenue and expense accounts for a given time period. The statement of owner's equity shows the changes of the owner's equity for a given time period. This may include additional investments as well as withdraws. The balance sheet is a listing of all assets, liabilities, and owner's equity for a given time period.

The financial statements are produced in that order as information from the income statement is used to complete the statement of owner's equity and the information from the statement of owner's equity is used to complete the balance sheet. The next step would be to journalize and post the closing entries. The closing entries are prepared after the financial statements are completed. The purpose of the closing entries is to prepare the accounts for the next reporting cycle.

The final step of the accounting cycle is to prepare a post-closing trial balance. The post-closing trial balance will.