The accounting process cycle has many processes and for most beginners in the accounting career path, this road can be very confusing. Traditionally, the accounting department is organized into various departments or sections such as Accounts Payable, Accounts Receivable, General Ledger, Payroll etc. Therefore, it is not uncommon to find employees who for most of their career have only worked in some departments of the entire accounting cycle process. The accounting staff who are not familiar with the entire accounting cycle process have neither been cross-trained nor given an opportunity to observe and understand the complete accounting process cycle. The purpose of this article is to explain the life cycle of the accounting process in a clear and concise manner to assist the accounting staff in the performance of their daily functions and ultimately the preparation of financial statements.
Purpose of the Accounting Cycle Process
The purpose of the accounting cycle process is to provide information for the preparation of the Financial Statements. The Financial Statements are the primary means of communicating financial information to external parties. Some business owners may say they do not need financial statements but we should note that there is a need to bring closure to an accounting period and start a new one. The second objective is to perform year-end closing process by closing the temporary accounts such as, Revenues, Expenses, and Gains and Losses. These accounts are reduced to zero balances at the end of the fiscal year in preparation for the accounting of activities in the upcoming accounting period.
In order to capture the information necessary to prepare the financial statements, it is vital to have a process in place. This leads us to the accounting cycle process that involves the identification, analysis and summarization of the entity’s transactions and then finally the preparation of the financial statements.
The Accounting Cycle Process
The accounting cycle process goes through the following ten (10) steps: The
- Gathering of information about external transactions from source documents;
- Analysis of the transactions;
- Recording of the transactions in the journal;
- Posting of the journals to the general ledger;
- Preparation of an unadjusted trial balance;
- Recording of adjusting journal entries and the posting to the general ledger;
- Preparation of an adjusted trial balance;
- Preparation of financial statements;
- Closing of income statement accounts to Retained Earnings ; and
- Preparation of post closing trial balance (at year- end only)
See our next blog posting of the Life Cycle of the Accounting Process summarised in a flow chart
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