This paper provides an overview of the accounting cycle, the systematic process businesses use to record, organize, and report financial transactions. Drawing on Warren, Reeve, and Duchac's foundational accounting text, the paper walks through all ten steps of the cycle — from analyzing and journalizing transactions through preparing financial statements and a post-closing trial balance. It also addresses the importance of ethics in accounting, noting how failures of ethical conduct have led to high-profile cases of fraud, inflated earnings, and significant financial harm. The paper serves as a concise introductory reference for students learning foundational accounting procedures.
For all types of 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.
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 are journalized and posted to the ledger. (10) A post-closing trial balance is prepared." (Warren, Reeve, & Duchac, 2012, p. 162)
The accounting cycle begins with analyzing and recording transactions. The bookkeeper, for example, would review invoices, purchase orders, bank statements, and similar documents. After the transactions have been analyzed, they are ready to be recorded in the journal using the double-entry accounting system. The double-entry accounting system means that each transaction is recorded in at least two accounts so that debits and credits remain equal.
After the transactions are recorded in the journal, they are posted to the ledger. A ledger is a book containing a business's individual accounts. Posting is simply the process of transferring data from the journal to the proper accounts in the ledger.
To verify that all debits and credits are 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 point in time.
The next step in the accounting cycle is to analyze the adjustment data. Adjustments are made to bring asset and liability account balances to their proper amounts and to update the corresponding revenue and expense accounts.
At this point, an optional end-of-period spreadsheet may be prepared. This spreadsheet is used to show the effects of the adjusting entries on the unadjusted trial balance.
In the following step, the adjusting entries are recorded in the journal and then posted to the ledger.
After all adjusting entries have been posted, an adjusted trial balance is prepared. This is again done to verify that all debits and credits are equal.
The next step is to prepare the closing entries. Closing entries are prepared after the financial statements are completed. The purpose of 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 verifies that debits and credits are equal in the permanent accounts and that all temporary accounts carry a zero balance.
Once the adjusted trial balance is complete, the next step is 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 in the owner's equity for a given period, which may include additional investments as well as withdrawals. 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 because information from the income statement is used to complete the statement of owner's equity, and information from the statement of owner's equity is used to complete the balance sheet.
"Discusses fraud, greed, and ethical standards"
From the initial transaction to the preparation of the financial statements and the closing entries, the accounting cycle is a series of steps used to complete and verify the financial makeup of a business.
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