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Accounting Process 2

The accounting cycle is a series of steps that begins with recording transactions and ends with closing the books for the reporting period. The major steps include identifying transactions, preparing source documents, analyzing and classifying transactions, recording transactions in journals, posting to ledger accounts, preparing an unadjusted trial balance, making adjusting entries, preparing an adjusted trial balance, creating financial statements, making closing entries to clear temporary accounts, posting closing entries, and preparing an after-closing trial balance.

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55 views

Accounting Process 2

The accounting cycle is a series of steps that begins with recording transactions and ends with closing the books for the reporting period. The major steps include identifying transactions, preparing source documents, analyzing and classifying transactions, recording transactions in journals, posting to ledger accounts, preparing an unadjusted trial balance, making adjusting entries, preparing an adjusted trial balance, creating financial statements, making closing entries to clear temporary accounts, posting closing entries, and preparing an after-closing trial balance.

Uploaded by

Lala Ardila
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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THE ACCOUNTING PROCESS (THE ACCOUNTING CYCLE)

The accounting process is a series of activities that begins with a transaction and ends with the closing of
the books. Because this process is repeated each reporting period, it is referred to as the accounting cycle
and includes these major steps:

1. Identify the transaction or other recognizable event.


2. Prepare the transaction source document such a purchase order or invoice.
3. Analyze and classify the transaction. This step involves quantifying the transaction in monetary
terms (e.g. dollars and cents) identifying the accounts that are affected and whether those
accounts are to be debited or credited.
4. Record the transaction by making entries in the appropriate journal, such as the sales journal,
purchase journal, cash receipt or disbursement journal, or the general journal. Such entries are
made in chronological other.
5. Post general journal entries to the ledger accounts.
The above steps are performed throughout the accounting period as transactions occur or in
periodic batch process. The following steps are performed at the end of the accounting period:
6. Prepare the trial balance to make sure that debits equal credits. The trial balance is a listing of all
the ledger accounts, with debits in the left column and credits in the right column. At this point no
adjusting entries have been made. The actual sum of each column is not meaningful; what is
important is that the sums be aqual. Note that while out-of-balance columns indicate a recording
error, balanced columns do not guarantee that there are no errors. For example, not recording a
transaction or recording it in the wrong account would not cause an imbalance.
7. Correct any discrepancies in the trial balance. If the columns are not in balance, look for math
errors, posting errors, and recording errors. Posting errors include:
 Posting of the wrong amount
 Omitting a posting
 Posting in the wrong column, or
 Posting more than once
8. Prepare adjusting entries to record accrued, deferred, and estimated amounts.
9. Post adjusting entries to the ledger accounts.
10. Prepare the adjusted trial balance. This step is similar to the preparation of the unadjusted trial
balance, but this time the adjusting entries are included. Correct any errors that may be found.
11. Prepare the financial statements.
 Income statement: prepared from the revenue, expenses, gains, and losses.
 Balance sheet: prepared from the assets, liabilities and equity accounts
 Statement or retained earnings: prepared from net income and dividend information.
 Cash flow statement : derived from the other financial statements using either the direct
or indirect method
12. Prepare closing journal entries that close temporary accounts such as revenue, expenses, gains,
and losses. These accounts are closed to a temporary income summary account, from which the
balance is transferred to the retained earning account (capital). Any dividend or withdrawal
accounts also are closed to capital.
13. Post closing entries to the ledger accounts.
14. Prepare the after-closing trial balance to make sure that debits equal credits. At this point, only
the permanent account appear since the temporary ones have been closed. Correct any errors.
15. Prepare reversing journal entries (optional). Reversing journal entries often are used when there
has been an accrual or deferral that was recorded as an adjusting entry on the last day of the
accounting period. By reversing the adjusting entry, one avoids double counting the amount when
the transaction occurs in the next period. A reversing journal entry is recorded on the first day of
the new period.

Instead of preparing the financial statement before the closing journal entries, it is possible to prepare
them afterwards, using a temporary income summary account to collect the balances of the temporary
ledger accounts (revenue, expenses, gains, losses, etc) when they are closed. The temporary income
summary account then would be closed when preparing the financial statements.

Source: http://www.netmba.com/accounting/fin/process/

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