Accounting has put businesses to a science by keeping score of money that comes in and out of the company. The steps are complicated but it lets an owner quantify his profits and losses with accounting books.
There are several activities in the accounting cycle which starts with transactions and wraps up with closing of books. The same steps are taken for reporting periods on a regular basis which makes this an accounting cycle and being able to keep tabs of what occurred from start to end. Accounting of transactions starts with a document such as invoices or purchase orders. The transaction is then categorized and matched with account where it should be credited or debited. It is also necessary that the amount involved in the transaction is specified in exact amounts. The next step is record the transaction using journal entries. These journals may be called a purchase journal, sales journal, disbursement journal or a general journal. As each transaction occurs, they are entered in the journal so everything is jotted down in the right chronological order. These journal entries should be posted on ledger accounts.
End of Accounting Period
The steps outlined earlier are done throughout an accounting period and at the end of this period, there are a few extra steps to follow. One starts with a trial balance where credits are checked against debits to ensure that they are equal. Usually, debits are listed on the left column and credits on the right column. Discrepancies can be corrected at this time and it may be because of errors in posting the right amount, posting twice, posting in the wrong column and so on. After this, one is now ready to start adjusting entries to be able to record deferred, accrued or estimated amounts. These adjusting entries are then posted to ledger accounts. The next step is preparing a trial balance but this time, it includes adjusting entries too. Once errors are corrected on this trial balance, financial statements are then prepared.
After the financial statements are completed, one is ready with closing journal entries. Temporary accounts like expenses, profits and losses are closed to income summary. Closing entries should then be posted to ledger accounts and another trial balance is done, looking at permanent accounts because all temporary accounts had been closed at this point. It is optional to prepare a reverse journal entry which is indicated for accruals or deferrals categorized as adjusting entry and it’s already last day for the accounting period.