Question

For this assignment please identify the 10 steps in the accounting cycle and explain the purpose of each step in a short paragraph. As you are writing please keep in mind that the question is asking for the PURPOSE of each step, not HOW it is completed! When thinking about the purpose of a step consider why we are completing it or what it tells us after it is completed. Be sure that you consider the steps that we learned about in chapters 1-6, and not those from an Internet website which may be somewhat different.

Answer 1

Accounting cycle is a collective process of recording and processing the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements. Additional accounting records used during the accounting cycle include the general ledger and trial balance.

Steps and their purpose in accounting cycle

1. Identifying and Analyzing Business Transactions

-The accounting cycle starts with identifying and analyzing business transactions and events. Not all transactions and events are entered into the accounting system. Only those that pertain to the business entity are included in the process.

2.Recording in the Journals

- After identifying the transaction next step is to journalise these transactions in choronological order. the purpose to journalise the transactions to have a record of transaction date wise which can be used and refered in future.

3.Posting to the Ledger

-The ledger is a collection of accounts that shows the changes made to each account as a result of past transactions, and their current balances.The purpose of ledger is to classify transactions into one account so balance under each account can be determined. for example at end of the year company wants to know their cash balance which can be accessed through cash account.

4.Unadjusted Trial Balance

-All account balances are extracted from the ledger and arranged in one report. Afterwards, all debit balances are added. All credit balances are also added. Total debits should be equal to total credits.if total debot balance is not equal to total credit balance then their must be some error in recording or posting so the purpose of trial balance to check errors and omission.

5.Adjusting Entries

-Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the accounting period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been earned but not entered in the books.Adjusting entries are prepared to update the accounts before they are summarized in the financial statements.Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and allowances.

6.Adjusted Trial Balance

-An adjusted trial balance may be prepared after adjusting entries are made and before the financial statements are prepared. This is to test if the debits are equal to credits after adjusting entries are made

7.Financial Statements

-When the accounts are already up-to-date and equality between the debits and credits have been tested, the financial statements can now be prepared. The financial statements are the end-products of an accounting system.A complete set of financial statements is made up of: (1) Statement of Comprehensive Income (Income Statement and Other Comprehensive Income), (2) Statement of Changes in Equity, (3) Statement of Financial Position or Balance Sheet, (4) Statement of Cash Flows, and (5) Notes to Financial Statements.

8.Closing Entries

Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare the system for the next accounting period. Temporary accounts include income, expense, and withdrawal accounts. These items are measured periodically.The accounts are closed to a summary account (usually, Income Summary) and then closed further to the appropriate capital account. Take note that closing entries are made only for temporary accounts. Real or permanent accounts, i.e. balance sheet accounts, are not closed.

9.Post-Closing Trial Balance

In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to test the equality of debits and credits after closing entries are made. Since temporary accounts are already closed at this point, the post-closing trial balance contains real accounts only.