Accounting Cycle
| Author | Allie Miller |
| Pages | 1-7 |
Page 1
The primary objectives of the accounting function in an organization are to process financial information and to prepare financial statements at the end of the accounting period. Companies must systematically process financial information and must have staff who prepare financial statements on a monthly, quarterly, and/or annual basis. To meet these primary objectives, a series of steps is required. Collectively these steps are known as the accounting cycle.
Collect and analyze data from transactions and events: As transactions and events related to financial resources occur, they are analyzed with respect to their effect on the financial position of the company. As an example, the sales for a day in a retail establishment are collected on a cash register tape. These sales become inputs into the accounting system. Every organization establishes a chart of accounts that identifies the categories for recording transactions and events. The chart of accounts for the retail establishment includes Cash and Sales.
Journalize transactions: After collecting and analyzing the information obtained in the first step, the information is entered in the general journal, which is called the book of original entry. Journalizing transactions may be done continually, but this step can be done in a batch at the end of the day if data from similar transactions are being sorted and collected, on a cash register tape, for example. At the end of the day, the sales of $4,000 for cash would be recorded in the general journal in this form:
Cash 4000
Sales 4000
Page 6
Post to general ledger: The general journal entries are posted to the general ledger, which is organized by account. All transactions for the same account are collected and summarized; for example, the account titled Sales will accumulate the total value of the sales for the period. If posting were done daily, the Sales account in the ledger would show the total sales for each day as well as the cumulative sales for the period to date. Posting to ledger accounts may be less frequent, perhaps at the end of each day, at the end of the week, or possibly even at the end of the month.
Prepare an unadjusted trial balance: At the end of the period, double-entry accounting requires that debits and credits recorded in the general ledger be equal. Debit and credit merely signify position—left and...
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