The time period principle allows a corporation to file its financial statements on a regular basis. The Accounting Cycle starts with the reporting of individual transactions and concludes with the production of financial statements and the closure of accounts.The accounting cycle includes all accounts, journal entries, T transactions, debits, and credits, changing entries over the entire cycle. The cycle is repeated every fiscal year as long as the company remains in operation.
Accounting Cycle Completion Steps
The Accounting Cycle steps are given as below:
Analysis of transactions and collection of data:
The company’s accountant gathers data and analyzes transactions.
The accountant must analyze each transaction, figure out the causes, place it in the appropriate accounts, and then evaluate it.
The transactions are recorded in the first books of the accounts.
Each transaction is transferred to the General Journal; and for each entry, a description is written to show the purpose behind the debiting or crediting of each account.
Journalizing and verifying is vital, because any mistake at this point of reporting will lead to cascading effect subsequently.
Recording the journals into the ledger accounts:
Posting is required to provide a full record of all accounting transactions in the general ledger used to produce the company’s financial statements.
Preparing an unadjusted trial balance:
The unadjusted trial balance is generated from the closing balances of the general ledger accounts.
Then, the sum of the entries on the debit side and the credit side are determined and checked whether or not the two sides have identical balances.
Performing adjusting entries:
The modification entries are prepared in this phase. Adjusting entries are journal entries recorded at the end of the accounting period that change the final balances of different general accounts.
Such changes are made to match the published results more closely with the actual financial situation of the company.
Creating adjusted trial balance:
Modified trial balance is prepared after passing the changing entries.
The final outcome of this modified trial balance thus shows the impact of all financial incidents which happened during that particular reporting period.
The trial balance is called the adjusted trial balance because it is updated after the adjustment entries have been completed and, as a result, the trial balance will be used to prepare the most relevant financial statements.
Creating financial statements:
Financial statements can be compiled directly from the adjusted trial balance.
The most important financial statements compiled using the adjusted trial balance are the Income Statement, Balance Sheet and Cash Flow Statement.
Closing the books:
Closing the books means that all financial statements are prepared and all transactions are reported, reviewed, listed and documented.
After closing the accounts, a new accounting period would begin and the accountant would have to start doing the above steps again.
Creating a post-closing trial balance:
In order to ensure that the accounting transactions are correctly reported, reviewed and summarized, a post-closure trial balance is prepared.
The credit side and the debit side are compared to see whether everything is in the right order or not.
Completing the above measures would complete the company’s accounting cycle and make it available for the next fiscal period.
Importance of Completing the Accounting Cycle
Compliance: Facilitates the business firms to work in compliance with federal regulations, rules, and tax codes.
Efficiency: Serves as a model to practice efficient accounting system in the future.
Internal Analysis: Provides opportunity for analyzing, reviewing, and reflecting internal financial performance.
Time Management: Schedules production and management events according to the fiscal year.
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