Steps of the Accounting Cycle

1. Analyze and measure transactions.

Obviously in this phase, your business collects their transactions for analysis, measurement,
and recording. But here's the first hang-up: what do you have to record?

As a general rule of thumb, a business should minimally record:

1. All cash sales.
2. All purchases (no matter how small).
3. Anything that's measurable, relevant, or reliable.
4. All events:

o External transactions: are between the entity and its environment, such
as exchanges with another company or a change in the cost of goods your business purchases.

o Internal transactions: are exchanges that occur within the organization.

In short, a company records as many transactions as possible that affect its financial position.

2. Record transactions in the journal.

This is also known as journalizing. A journal chronologically lists transactions and other events
in terms of debits and credits to accounts. Each journal entry consists of four parts:

1. The accounts and amounts to be debited. 2. The accounts and amounts to be

credited. 3. The date of transaction. 4. A transaction explanation.

3. Post information from the journal to the ledger.

This is the act of transferring information from the journal to the ledger. Posting is needed in
order to have a complete record of all accounting transactions in the general ledger, which is
used to create a company's financial statements.

4. Prepare an unadjusted trial balance.

The unadjusted trial balance is a list of the accounts and their balances at a given time, before
any adjusting entries are made to create financial statements. The accounts are listed in the
order which they appear in the ledger, with debit balances listed in the left column and credit
balances in the right column. The totals of these two columns must match.

5. Preparing adjusting entries.

Adjusting entries are journal entries recorded at the end of an accounting period that alter the
final balances of various general ledger accounts. These adjustments are made in order to more
closely align the reported results and the actual financial position of a business. Adjusting
entries follow the principles of revenue recognition and matching.
 6. Prepare an adjusted trial balance.
After journalizing and posting all adjusting entries, many businesses prepare another trial
balance from their ledger and accounts. This is called the adjusted trial balance. It shows the
balance of all accounts, including those adjusted, at the end of the accounting period.
Therefore, the end result of this adjusted trial balance demonstrates the effects of all financial
events that occurred during that particular reporting period.

7. Prepare financial statements.

Financial statements can be prepared directly from the adjusted trial balance. A financial
statement is an organization's financial results, condition, and cash flow.

8. Prepare closing entries.

In the closing phase, temporary balances are reduced to zero in order to prepare the accounts
for the next period's transactions. This process empties the entity's temporary accounts and
deposits anything remaining into a permanent account.

9. Prepare a post-closing trial balance.

The post-closing balance consists only of assets, liabilities, and owners' equity, also known as
real or permanent accounts. This balance provides evidence that the company has properly
journalized and accurately posted the closing entries.

Journal - book of original entry

Ledger - book of accounts; balances of cash…; detailed listing of transaction
T-accounts - presentation of a ledger

Financial Statements:
⁃ Income Statement (Nominal or Temporary Accounts - include revenues, expense, and
withdrawal accounts; are closed to prevent their balances from being mixed with those of the
next period; comprehensive income)
⁃ Balance Sheet (Permanent or Real Accounts - refer to asset, liability and capital
accounts; are not closed at the end of the accounting period, instead, you carry over your
permanent account balances from period to period) statement of financial position
⁃ Changes in Equity
⁃ Cash Flow Statement

income/expense summary - a temporary account; close!; if it’s credit - income; new entry to
close; gawing debit! to close; to close, credit to capital

Accounting Cycle:
1. Analysis of Transactions - is where you read, understand, and investigate the
transactions
2. Recording/Journalizing Transactions in the Journal - this is where the debit and credit
part comes in. you will record the accounts and amounts to be debited or credited.
3. Posting to the Ledger - this is where you transfer information from journal to their
particular type or the ledger.
4. Preparing Unadjusted Trial Balance - the accounts and their balances are listed in the
trial balance. the totals of these two must match.
5. Adjusting Entries - yung prepaid insurance - prepaid expense -
6. Preparing the Adjusted Trial Balance - updating the values of some accounts
7. Preparing the Basic Set of Financial Statements - income statement, balance sheet, —
—cash flow, change in equity
8. Closing Entries - done at the end of the period to bring all accounts back to zero and
prepare for the next period (close nominal account)
9. Post-closing Trial Balance - closing the permanent accounts (balance sheet)
10. Reversing Entries - for temporary accounts (income statement)

The accrual method of accounting reports revenues on the income statement when they are
earned even if the customer will pay 30 days later.

Your balance sheet accounts include:

⁃ Cash. This is the cash you receive during regular transactions at your
business. For instance, when you sell inventory and receive payment, this is documented in the
cash account. Your cash account will be listed as a current or short-term asset on your balance
sheet.
⁃ Deposits. As a small business, you may have placed security deposits
before. You do this when you are giving someone else money to hold against future charges.
These are often referred to as “Security Deposits Receivable.” Security deposits are considered
current assets on your balance sheet.
⁃ Intangible assets. These are nonphysical assets. Patents, copyrights,
customer lists, literary works, and broadcast rights are all common examples. These are listed
as current assets on your balance sheet.
⁃ Short-term investments. These investments get converted into cash
within one year. They’re also recorded in the current assets section of your balance sheet.
⁃ Accounts receivable. This involves the money your customers owe you
for products or services that they have received but have not paid for yet. These are
documented as assets on your balance sheet.
⁃ Prepaid expenses. These include transactions for which payments have
been made in advance. For example, you may pay rent on a commercial space before you use
it. This transaction, as well as your other prepaid expenses, would be recorded as an asset on
your balance sheet.
⁃ Long-term investments. These are typically investments that do not get
converted into cash within one year. They can include stocks, bonds, real estate, and
sometimes cash. Your long-term investments are recorded on the asset side of your balance
sheet.
⁃ Accounts payable. This is the amount of money you owe suppliers or
creditors. Your accounts payable are current liability accounts on your balance sheet.
⁃ Accrued expenses. These can include wages, interest, utilities, repairs,
bonuses, and taxes. These are considered liability accounts.
⁃ Credit card. If you have a credit card for just your small business, you’re
not alone. This is a common practice. Purchases made with credit cards are recorded as liability
accounts on your balance sheet.
⁃ Short-term debt. This account is shown in the current liabilities portion of
your balance sheet. This encompasses any debt that is due within one year. One example of
short-term debt is payroll taxes.
⁃ Long-term debt. This is debt that will not be due within one year.
Examples include bonds payable, long-term loans, lease obligations, or convertible bonds.
These are recorded in the liabilities section of your balance sheet.
⁃ Equity. Owners’ equity is a separate section of the balance sheet. This
section includes the par value of stock, amounts paid in capital, and your retained earnings.