Accounting Cycle

The understanding of  accounting cycle is a very basic. So here it is the cycle :

0. Identifying and recording transactions and other events

Determine what to record, either internal events like paying salaries or using raw material nor external events like sales transaction or buy from supplier.

1. Journalizing

Put transactions or other events in the journal. The simplest form is general journal that chronologically list transactions or other events, expressed in debits and credits to accounts.

2. Posting

Transfer journal to ledger accounts, such as cash account, common stock account, notes payable account. Each account will be recorded from the information get from the journal. Accounts will get three column form of account, consists of account name, debit, credit, and balance.

3. Trial balance preparation

Trial balance lists accounts and their balance at a given time. Usually, company prepares a trial balance at the end of an accounting period. Trial balance consists account names, debit, and credit. In the debit column, there are accounts of assets, such as cash, account recievable, inventory, and some fix assets. In the credit column, there are accounts of liabilities and equities, such as note payable, common stocks, and dividend. Sum of debit and credit value should be balance to each other.

4. Adjusting entries

Companies adjust entries in trial balance at the end of accounting period to ensure revenue recognition and matching principle. Adjusting entries make it possible to report balance sheet the appropriate assets, liabilities, and equity at the statement date. And also, income statement the proper revenues and expenses for the accounting period.

Companies usually adjust entries on defferal (prepaid expenses and unearned revenues) and accruals (accrued revenues and accrued expense).

5. Adjusted trial balance

After trial balance adjusted, companies prepare aonter trial balance from its ledger accounts, which called adjusted trial balance. It consists already additional adjusting factor, such as depreciation, prepaid insurance expense, accrued salary expense.

6. Financial statement preparation

Company can prepare financial statements directly form adjusted trial balance. Financial statements  consists of balance sheet, income statement, cashflow statement, and retained earning statement.

7. Closing

Closing process zeroes the balance of nominal (temporary) accounts, such as revenue and expense account balance (which reported in income statement). Companies transfer all of the revenue and expense to a clearing or suspense account called income summary, which matches revenue and expense.

8. Post closing trial balance

Post closing trial balance consists only real acounts, such as assets, liabilities, and equity.

9. Reversing Entries

After closing, companies may reverse some of the adjusting entries before start next period of accounting period. These are called reversing entries.

***

Source: Keiso, D., 2010. “Intermediate Accounting 13th ed”. John Willey & Sons (Asia) Pte. Ltd.

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