The Accounting Cycle

The Accounting Cycle

The accounting cycle is a set of inter-related procedures with an objective of producing financial reports by analyzing, recording, classifying and summarizing business transactions. The procedures are inter-related since the following procedure is dependent on the result of preceding procedure. The period in which the procedures of the accounting cycle are being performed is called the accounting period.

  

 Simple Explanation and illustration of the accounting cycle:

The Accounting Cycle	Activities
Analyzing Business Transactions	Gathering, Organizing, and Filing of Source Documents of business transactions. Identifying the elements and the specific accounts affected by the business transactions. Determining the effects (increase or decrease) of the business transactions to the identified elements and accounts.
Journalizing	Recording to the journal (the book of original entry) using the concept of debit and credit.
Posting	Transferring the different journal entries to the ledger (the book of final entry) to summarize the effects of the different business transactions to particular accounts.
Unadjusted Trial Balance	Serves as check and balance – whether the books of accounts are still balanced. Ascertaining whether there are no clerical errors has been made.
Adjustments	In order to reflect the accrual and matching principles of accounting, the records are needed to be adjusted for any deferrals or accruals. Additional journal entries and postings are needed to be made for any accrued income or expense, prepaid expenses, unearned income, depreciation or doubtful accounts.
Adjusted Trial Balance	Just like the unadjusted trial balance – it also reflects the adjustments made.
Financial Statements	Using the accounts and the respective balances in the adjusted trial balance, financial statements are constructed to provide information about the financial position, performance and the changes in the financial position of the company. The following are the different composition of a complete set of financial statements: 1. Statement of Financial Position or Balance Sheet 2. Statement of Comprehensive Income or Income Statement 3. Statement of Cash Flows 4. Statement of Changes in Owner’s Equity 5. Notes to the financial statements including the policies, explanation, and schedules pertaining to the different items included in the parts of the financial statements.
Closing Entries	After financial statements has been constructed, closing the books means that nominal accounts or those that only pertains to a particular accounting period (these are the income, expenses, and withdrawals) are to be close (bringing it to zero balance) to the owner’s equity account.
Post-Closing Trial Balance	Just like the unadjusted and adjusted trial balances – it only reflects the accounts that were not closed or the real accounts (these are the assets, liabilities, and owner’s equity accounts)