Here’s a brief reviewer about the **Accounting Cycle** to guide your understanding:
---
**The Accounting Cycle**
The accounting cycle is the step-by-step process of recording and processing a company’s
financial transactions. It ensures accuracy and consistency in financial reporting.
---
### **Steps in the Accounting Cycle**
#### 1. **Identifying Transactions**
- Recognize business transactions that affect the company’s finances.
- Examples: sales, purchases, loans, or expenses.
#### 2. **Recording Transactions**
- Use **source documents** (e.g., invoices, receipts) to record transactions in the **journal**
using double-entry bookkeeping.
- Each transaction must have a debit and a credit.
#### 3. **Posting to the Ledger**
- Transfer journal entries into the **general ledger**, which categorizes transactions into
accounts (e.g., Cash, Accounts Payable).
#### 4. **Unadjusted Trial Balance**
- Summarize all ledger accounts to prepare the **trial balance**.
- Ensures total debits equal total credits.
#### 5. **Adjusting Entries**
- Make necessary **adjustments** for accruals and deferrals to ensure revenue and expenses
are recognized in the correct period.
- Examples:
- Accrued Revenue: Income earned but not yet received.
- Prepaid Expenses: Expenses paid in advance.
#### 6. **Adjusted Trial Balance**
- Prepare a new trial balance after adjustments to confirm debits still equal credits.
#### 7. **Financial Statements**
- Create the following statements:
1. **Income Statement**: Shows profit or loss.
2. **Balance Sheet**: Displays assets, liabilities, and equity.
3. **Cash Flow Statement**: Tracks cash inflows and outflows.
#### 8. **Closing Entries**
- Close temporary accounts (revenues, expenses, and dividends) to transfer balances to
**Retained Earnings** in the equity section.
- This resets these accounts for the next accounting period.
#### 9. **Post-Closing Trial Balance**
- Verify that all temporary accounts are closed and only permanent accounts (assets,
liabilities, equity) remain.
#### 10. **Reversing Entries** *(Optional)*
- Reverse certain adjustments (e.g., accruals) at the beginning of the next accounting period
to simplify recording future transactions.
---
### **Key Terms**
- **Debit and Credit**: The two sides of a journal entry; must always balance.
- **Chart of Accounts**: A list of all accounts used in the general ledger.
- **GAAP (Generally Accepted Accounting Principles)**: Standard guidelines for financial
reporting.
---
### **Tips for Mastering the Accounting Cycle**
1. **Understand Double-Entry Accounting**: Every transaction affects at least two accounts.
2. **Regularly Review Adjustments**: Avoid errors in accruals and deferrals.
3. **Reconcile Accounts**: Frequently match records with bank statements.
4. **Automate Where Possible**: Use accounting software to minimize human errors.
---
This process repeats each accounting period, ensuring financial statements are accurate and
reliable.
