The Accounting Cycle
The accounting cycle can be perceived as a series of activities that are crucial in identifying, recording and analyzing a business’s transactions information. At the end of each accounting period, the business accountant should aggregate these transactions into financial statements. Note that the accounting cycle is the core activity that an accounting department engages on an ongoing basis. This article will focus on the major sections of accounting function that make the accounting cycle.
Identifying an event that causes an accounting transaction
This is the initial step in accounting process and involves identifying what exactly caused a transaction. For example, buying materials, selling products to clients, providing services to clients, and receiving a payment are some of the events that can cause a transaction.
Preparation of business document associated with the transaction
Such business documents could include customer invoice, supplier invoice, cash receipts, petty cash voucher (Also see Importance of a Petty Cash Book), and more. These documents act as the source documents as they provide the initial information regarding the transaction.
Identification of the accounts affected by the transaction
According to the double entry bookkeeping system, one transaction affects at least two accounts. Therefore, the accountant should identify the accounts affected by the transaction before recording the transaction.
Recording each transaction in the appropriately
In this step, the accountant should record the accounting information in the specific journals including cash receipts journal, sales journals, cash disbursement journal, and more which are later transferred to the general ledger. Besides, you can post such transactions directly to the general ledger.
Preparation of preliminary trial balance
At the end of the accounting period, you will need to prepare a preliminary trial balance. You should list all credit lances in the right column and the debits in the left column. Note that the total amounts of the credit side should be equal to the total amount of the debit side.
Preparation of the adjusted trial balance
After preparing the preliminary trial balance, you will need to check for any errors and correct them with the adjusting entries. The adjusted trial balance must reflect the results of operations and the financial position of the business.
Preparation of the financial statements from the adjusted trial balance
After preparing the adjusted trial balance, you can now create the financial statements. These include:
- Income Statement
- Statement of cash flows
- Balance sheet
- Statement of retained earnings
- The necessary accompanying disclosures
Close the books for that reporting period
Closing the books involves shifting all the temporary accounts balances into you business income summary account and then to the retained earnings accounts.
Understanding the accounting cycle is the key to ensuring that all the necessary accounting activities are done effectively. Alternatively, you can consider using an accounting service in Singapore to let the experts do the works for you.