Accounting Cycle
The accounting cycle is a process used to record financial transactions and produce financial statements.
What routine and checklists are needed to manage this process optimally?
Here are the critical events in the accounting cycle:
Analyze transactions: In this step, the company identifies and evaluates its financial transactions to determine the accounts affected by each transaction.
Journalize transactions: The company records each transaction in a journal, including the date, amount, accounts affected, and a brief description.
Post to the general ledger: The company transfers the transaction data from the journal to the general ledger, which is a permanent record of all accounts and their balances.
Prepare a trial balance: The company creates a trial balance to ensure that the total debits equal the total credits in the general ledger.
Make adjusting entries: Adjusting entries are made to update account balances and ensure that financial statements accurately reflect the company's financial position.
Prepare an adjusted trial balance: After adjusting entries are made, a new trial balance is created to ensure that the debits still equal the credits.
Prepare financial statements: The company creates financial statements from the adjusted trial balance, including the income statement, balance sheet, and statement of cash flows.
Close the books: Closing entries are made to transfer balances from temporary accounts (such as revenue and expenses) to the retained earnings account.
Prepare a post-closing trial balance: The post-closing trial balance ensures that all temporary accounts have been closed and that the retained earnings account reflects the company's ending balance.
Reversing entries (optional): Reversing entries are made to reverse adjusting entries made in the previous accounting period to avoid double counting in the next period. This step is optional and not all companies use it.
The accounting cycle then starts again with the analysis of new financial transactions.
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