Detailed Description of the Accounting Process Cycle

Our topic of the Life Cycle of the Accounting Process continues. This time I add more details about the 10 steps of the entire accounting life cycle process.

The detailed description of each of the accounting process cycle follows here below:

1.  Gathering of information About External Transactions from Source Documents

This information relates to the external transactions that involve an exchange transaction with an outside entity. They include: Sales invoices, bills from suppliers, cash register tapes etc.

 2.  Analysis of the Transactions

This involves reviewing source documents to determine the dual effect on the accounting equation, that is, determine which accounts to debit and credit.

3.  Recording of  the Transactions in the Journal

This involves recording the details of the transaction in a journal in order to post the item in the General Ledger. Journals provide a chronological record of all economic events affecting an organization.

 4.  Posting of the Journals to the General Ledger Accounts

Once the journals are recorded the next step is to record the journal into the general ledger. A general ledger is simply a collection of all the entity’s various accounts. Most accounting systems today are computerized. For these systems, the journal input information is automatically and instantaneously posted to the general ledger accounts.

5.  Preparation of  an  Unadjusted Trial Balance

Before financial statements are prepared and before adjusting journal entries are recorded at the end of an accounting period an adjusted trial balance is usually prepared. A Trial balance is simply a list of the general ledger accounts and their balances at a particular date. This step is necessary to ensure that the debits and credits are in balance. This does not mean there are no errors. Compensating errors can still make this ledger balanced.

 6.  Recording of  Adjusting Journal Entries and the Posting to the General Ledger

This is the time to record the internal transactions. These transactions do not involve an exchange transaction with another external entity and therefore are not initiated by a source document. They are recorded at the end of any period when financial statements are prepared. These transactions are commonly known as adjusting journal entries. Adjusting journal entries are required to satisfy the accrual basis of accounting. Specifically, these entries are required to satisfy the realization and matching principle. Further, the recording of adjusting journal entries ensures that all revenues and expenses are recognized appropriately in the accounting period. Adjusting journal entries include:

  • Prepayments (deferrals) -When cash flow precedes either expense or revenue e.g. supplies, deferred revenue, depreciation, rent insurance etc
  •  Accruals- When the cash flow comes after either the expense or revenue recognition e.g. salary expense, interest expense etc
  • Estimates- e.g. depreciation, bad debt expense, etc

7.  Preparation of the Adjusted Trial Balance

After the adjusting journal entries are posted to the general ledger accounts, the next step is to prepare an adjusted trial balance. The term adjusted refers to the fact that adjusting entries have now been posted to the accounts.

8. Preparation of Financial Statements

The purpose of each of the previous processing cycles to this point is to provide information for the preparation of the financial statements. The financial statements are the primary means of communicating financial information to the external parties. The four basic financial statements are:

  • The Balance Sheet
  • The Income Statement
  • The Statement of Cash Flows
  • The Statement of Shareholders Equity

9.    Closing of the Income Statement Accounts to Retained Earnings

An interim reporting period is any period when the financial statements are produced other than at the end of the fiscal year. However, at the end of the fiscal year, two final steps are necessary; closing the Income Statement accounts and preparing the post closing trial balance. The closing process serves a dual purpose as follows:

  • The Income Statement accounts, revenues and expenses are reduced to zero balances making them ready to measure activity in the upcoming accounting period.
  • These Income Statement account balances are closed and transferred to retained earnings to reflect the changes that have occurred in the account during the period.

10.  Preparation of Post Closing Trial Balance (at year-end only)

After the closing entries are posted to the ledger accounts, a post closing trial balance is prepared. The purpose of this trial balance is to verify that the closing entries were prepared and posted correctly and that the accounts are now ready for next year’s transactions.

To make the Accounting Process Flow more fun and  even more easier to understand, in my next blog post I will summarize the Life Cycle of the Accounting Process in a single process follow diagram.

You may subscribe now to be receiving our regular insightful articles

Share
This entry was posted in Accounting Simplified. Bookmark the permalink.

30 Responses to Detailed Description of the Accounting Process Cycle

  1. Pingback: The Accounting Cycle Process Flow Chart | E-solutons CPAs Online

  2. I gotta favorite this web site it seems extremely helpful extremely helpful

  3. I like what you guys are up also. Such clever work and reporting! Keep up the excellent works guys I have incorporated you guys to my blogroll. I think it will improve the value of my site :).

  4. I am not sure where you’re getting your information, but good topic. I needs to spend some time learning more or understanding more. Thanks for great info I was looking for this information for my mission.

  5. What i do not understood is actually how you’re no longer really a lot more neatly-favored than you may be right now. You’re very intelligent. You realize thus considerably on the subject of this subject, produced me for my part consider it from so many various angles. Its like men and women are not interested unless it’s one thing to do with Girl gaga! Your individual stuffs nice. All the time maintain it up!

  6. I was studying some of your content on this site and I believe this internet site is very instructive! Keep on putting up.

  7. I simply could not depart your website prior to suggesting that I extremely enjoyed the usual info an individual supply on your visitors? Is gonna be back incessantly in order to check out new posts.

  8. I was reading through some of your blog posts on this internet site and I conceive this website is very instructive! Keep putting up.

  9. I like this web site very much so much wonderful information.

  10. Really nice layout and excellent subject matter, absolutely nothing else we need : D.

  11. Hello very cool website!! Guy .. Beautiful .. Wonderful .. I’ll bookmark your website and take the feeds also…I am satisfied to seek out so many helpful information right here in the submit, we want develop extra techniques in this regard, thank you for sharing.

  12. I think you have produced some rather interesting points. Not as well many ppl would actually think about it the way you just did. I am truly impressed that there is so much about this subject that has been unveiled and you made it so nicely, with so considerably class. Topnotch one, man! Very special things right here.

  13. Very interesting details you have mentioned, thank you for posting.

  14. You are my inspiration , I have few blogs and often run out from to brand.

  15. I really like your writing style, excellent info, appreciate it for posting :D. “Much unhappiness has come into the world because of bewilderment and things left unsaid.” by Feodor Mikhailovich Dostoyevsky.

  16. Real nice style and design and good articles, hardly anything else we require :D.

  17. You have noted very interesting points! ps nice web site.

  18. I really like your writing style, wonderful information, thankyou for putting up : D.

  19. you’ve gotten an ideal weblog right here! would you wish to make some invite posts on my blog?

  20. This article gives the light in which we can observe the reality. this is very nice one and gives indepth information. thanks for this nice article

  21. dating says:

    Pretty good post. I just stumbled upon your blog and wanted to say that I have really enjoyed reading your blog posts. Any way I’ll be subscribing to your feed and I hope you post again soon.

  22. I’m still learning from you, and I’m educating myself. I really enjoy reading everything that’s written on your site. Keep the posts coming. Really love it!

  23. Actually I like your blog details! Undoubtedly an fine supply of information that is extraordinarily helpful. Cheers.

  24. What I find troublesome is to find a blog that can capture me for a minute however your site is different. Well Done.

  25. Home Page says:

    Howdy very cool website!! Guy .. Beautiful .. Superb .. I’ll bookmark your site and take the feeds also…I am happy to find so many helpful info right here within the publish, we want develop extra strategies on this regard, thanks for sharing.

  26. Im impressed, I should say. Pretty rarely do I come across a blog thats each informative and entertaining, and let me let you know, youve hit the nail on the head. Your weblog is crucial; the problem is one thing that not adequate individuals are talking intelligently about. Im really happy that I stumbled across this in my search for something relating to this problem.

  27. I visited a lot of website but I conceive this one has something extra in it. “Never try to tell everything you know. It may take too short a time.” by Norman Ford.

  28. Pingback: Homepage

Leave a Reply to dating Cancel reply

Your email address will not be published. Required fields are marked *