Businesses need to ensure that their financial records are accurate, up to date, and in accordance with accepted accounting principles. They can achieve this objective by following the accounting cycle.
These are the steps that make up the accounting cycle...
1) Analysis
Analyzing all of the transactions from the past year, and locating all relevant documents and receipts, is the first step that needs to be taken.
2) General Journal
Next, it is necessary to create a central record of all of the transactions. This record is referred to as a General Journal.
3) Posting
Following the journalizing of transactions, they are then transferred and posted to the ledger. This paper / electronic trail is important to verify accuracy and to refer to if accounts are found not to be balancing up later on.
4) The Unadjusted Trial Balance
The next step is to total up debit and credit balances to ensure that they are equal. Information from the ledger should also be compiled so that financial statements can be prepared.
5) Adjustment
Now that external transactions (such as supply purchases and utility payments) have been recorded and verified, it is time to adjust the accounts for internal transactions (such as prepaid rent or unearned revenue).
6) The Adjusted Trial Balance
The preparation of the adjusted trial balance is the next task, which encompasses all internal and external transactions for the reporting period. Again, there accuracy is verified, by ensuring the credit and debit sums are equal.
7) Business Financial Statements
At this stage, a number of important financial statements are created. The Income Statement and Statement of Owner s Equity first, followed by the Balance Sheet.
8) Closing Of The Trial Balance
Permanent accounts now have their balances carried into the next period, while temporary accounts are closed. The last entries made in those accounts are posted to the capital account of the business, after which all balances (expense, revenue, withdrawal, etc.) should be zero.
9) Post Closing Trial Balance
Finally, comes the post closing trial balance, which lists the balances of the accounts that were not closed (such as liabilities, assets, and owner s equity). This trial balance helps verify that permanent accounts balance (i.e. that they have equal debit and credit sums) and that all temporary accounts were properly closed.
It is important that business owners understand the steps involved in this accounting cycle. The reason is that they are ultimately responsible for any mistakes, whether by accident or not, in their finances.
That is not so say that they should do all of their accounting themselves, that would also be a mistake. Rather, the point is that proper accounting is so important to a business that it pays to be fully aware of what needs to be done, but to seek professional assistance in the doing of those things.
Therefore, it is highly recommended that business owners enlist the help of a reputable accounting firm. Not only will they ensure that the accounting cycle is appropriately followed, and that all legal obligations are met, they will also offer advice and feedback on how to better organize finances in the future.
Author Resource:
This article was written by an experienced accountant. You can learn more about them, and also find further accounting advice, by visiting: http://gotsisaccounting.com.au/
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