The Accounting Cycle
The accounting cycle involves a number of steps and processes. The process begins with the analysis of all the transactions that a firm has been involved in within a specified financial period. This includes income and expenditure transactions. It involves the analysis of invoices and checks and ends with the preparation of a trial balance (Weygandt, 2008). The cycle is made up of the following steps:
- Recording of source documents
- Making of the various journal entries
- Preparation of ledger accounts
- Preparation of the trial balance
- Preparation of the financial statements
An adjusted trial balance contains the closing balances of the various ledger accounts that have been opened for a specific financial period. These closing balance of ledgers are either debited or credited in the trial balance. To ensure that no errors have occurred in the posting, the credit and the debit balance of an adjusted trial balance should always be equal to each other (i.e. they should balance).
It is essential for a firm to prepare financial statements. These documents are essential since they represent a true and fair view of a given firm. Financial statements are prepared with the use of the entries that have been posted in a trial balance. It is therefore essential for an accountant to ensure that no errors have been made in the preparation of the trial balance. This ensures that only the correct values are used to prepare financial statements. This therefore ensures that they represent a true and fair view of the company (Weygandt, 2008).
The accounting cycle involves the five steps that have been mentioned above. Each one of these steps is essential as it forms the basis of the next step. The step begins with the recording of source documents (checks, cash receipts and invoices), preparation of ledger accounts of various transactions, the preparation of a trial balance and finally the preparation of financial statements. If one of these steps is not involved, it will be impossible to prepare other essential financial documents. This in turn means that the accounting standards, rules and procedures are not followed. As a result, the true and fair view of an organization will not be reflected.
Financial Statements
Financial statements are the financial reports of an organization. Financial statements are prepared from the balances that have been posted in a trial balance. They are used to show the financial status of an organization within a given fiscal year. The most important financial statements in order of their preparation include:
- The balance sheet
- Cash flow statement
- The income statement
- The statement of changes in owners equity
- Auditors report
In the running and operation of a business entity, financial statements are of great importance. This is because they are used as reports to show the status of various aspects and sectors of the business. The main aim of financial statements is to give the stakeholders of a business entity information pertaining the financial position and performance of the firm. Financial statements are also used to give stakeholders information with regards to the cash flow of the firm. The auditor’s report is also essential since it shows whether the financial statements and entries represent a true and fair view of a business entity. GAAP requires firms to prepare these financial statements in order to meet the rules, standards and regulations that have been set by the state. This ensures that there is uniformity on how these statements are prepared in all firms, whether public or private. GAAP also needs these statements to be prepared in order to detect any irregularities in financial bookkeeping. Although all the data that are used to prepare financial statements are contained in the trial balance, it is much easier for stakeholders to interpret the data from financial statements and compare it with previously made financial statements to determine trends.
Reversing Entries
Reverse entries are the entries that are made at the end of a financial period to reflect its impact on the accounting process on the next financial period. Normally, these are the closing balances of ledger accounts that are carried forward to the next period. This is done to adjust entries that were made on accruing income and expenses of an accounting period that has expired. If the closing balance of a specific account was a debit balance, its subsequent opening balance will be a credit (and vice-versa for a credit closing balance). Reverse entries are essential since they remove the need of preparing compound. Revenue and expenditure transactions normally require reverse entries (Weygandt, 2008).
Weekly Summary
This week’s learning has had a great impact on my accounting knowledge. From the various topics that we have covered in class, I have been able to understand the need of various financial transactions, the manner in which they are prepared and the overall outcome that they have on a business entity. I have gathered most of this information from group work, the study book and my personal research. This information has improved my though process of various financial transactions.
As a result of this weeks learning, I have been able to know the accounting cycle. I now understand the need of keeping financial records, making journal and ledger entries, preparing a trial balance and financial statements. At the same time, I am able to prepare all these financial documents. I have also understood what financial statements are, the need to prepare them, the importance they have in the running of a business entity and the rules, standards and regulations that govern their preparing. Finally, I now understand the need for having reverse entries in bookkeeping and the transactions that require reverse entries. With this knowledge and information, I believe I can undertake the process of bookkeeping at ease.
Reference
Weygandt, J. J. (2008). Financial accounting. Hoboken, NJ: John Wiley & Sons.