Accounting Cycle / Bookkeeping Cycle

The accounting cycle is a serial series of activities to determine and record an entity's individual transactions, that aggregative at the end of period into money statements. The accounting cycle is basically the core redecoration activity that an accounting department engages in progress basis, and forms the premise for the money statements. Most accounting controls and procedures relate to the accounting cycle.

The following discussion breaks the accounting cycle into the treatment of individual transactions, so closing the books at the top of the accounting amount.

The accounting cycle for individual transactions is:

1. Identify the events of accounting dealing. Examples of such events are:

Buy materials

Pay wages to workers

Apply overhead to inventory and also the value of goods sold

Sell merchandise to customers

Provide services to customers

Receive payment from customers

Recognize an expense

2. Prepare the business document related to the accounting dealing, like a provider invoice, client invoice, or money receipt.

3. Identify that accounts that affect the business document. With a processed method of accounting, there's typically a default account related to every provider, in order that the system assigns the quantity listed on a provider invoice to the default account (unless you override it). Similarly, there's typically a default account related to every client, in order that the system assigns beaked amounts to a selected revenue account whenever you produce an invoice for a client. There may additionally  be customaryized templet journal entries within the accounting code for varied standard transactions, like for recording monthly depreciation.

4. Record within the applicable accounts within the accounting information the amounts noted on the business document. this might involve recording transactions during a specific journal, like the money receipts journal, money disbursements journal, or sales journal, that posted later to the ledger. Such transactions may additionally  be announce on to the final ledger.

The preceding accounting cycle steps were related to individual transactions. the subsequent accounting cycle steps square measure solely used at the top of the accounting amount, and square measure related to the combination amounts of the preceding transactions:

1. Prepare a preliminary balance, that itemizes the debit and credit totals for every account. All debits square measure listed within the left column, and every one credits within the right column. The totals of the 2 columns trial balance be identical. If not, then there's a mistake somewhere within the underlying transactions that trial balance be corrected before continuing. In most accounting code systems, it's not possible to own transactions that don't end in matching debit and credit totals. If the balance is being ready manually, then probably reasons for unbalanced debit and credit totals are:

Only coming into a little of a dealing

Entering a part of a dealing over once

Entering an incorrect quantity

Entering an quantity as a debit rather than a credit (or vice versa)

2. Add increased things, record estimates, and proper errors within the preliminary balance with adjusting entries. samples of such things are:

Record expenses for provider invoices that haven't however arrived

Record revenue for client invoices that haven't however been beaked

Record errors noticed within the month-end bank reconciliation

Adjust for transactions that were ab initial recorded within the wrong account

Accrue for unpaid wages earned

3. Prepare an adjusted balance, which includes the preliminary balance and every one adjusting entries. it should need many iterations before this adjusted balance accurately reflects the results of operations and also the money position of the business that the data is being aggregative.

4. Prepare the financial statements from the adjusted balance. The core components of the money statements are:

Balance sheet

Income statement

Statement of cash flows

Retained earnings statement

Accompanying disclosures (footnotes)

5. Close the books for the coverage amount. This step is handled mechanically by AN accounting computing system. If you're collection accounting data manually, then closing the books involves shifting all temporary account balances (e.g., revenue, expenses, gains, and losses) into the financial gain outline account, and shifting the balance from there to the preserved earnings account.

6. Prepare and review a post-closing balance.This balance trial balance contain zero balances for all temporary accounts.

It is additionally helpful to print out the key documents supporting the finished money statements, and store them during a binder. this could embrace all journals, yet as supply documents for major journal entries, like the depreciation calculations. This data provides backup data for the money statements.