The Accounting Cycle - 1405 Words

The accounting cycle is the process by which companies produce their financial statements for a specific period of time. It consists of ten steps, each step depending on the information generated in the previous step. Any business that fails to follow the steps of the accounting cycle, or omits any piece of vital information, risks ending up lost in a wave of inaccurate numbers or accounts that don’t balance correctly. The first step in the accounting cycle is to collect all the documents related to the financial transactions of the business. These documents, called source documents, can be receipts, bank statements, checks, or purchase orders. They consist of any document providing evidence and data of the accounting transactions that†¦show more content†¦For example, all journal entry debits and credits made to Cash would be transferred to the corresponding Cash account in the ledger. This enables the calculation of the increases and decreases in cash, thus, the ending balance of Cash is then determined. After posting all the transactions to the ledger, the fourth step in the accounting cycle is to compute the unadjusted balances in each account and prepare the unadjusted trial balance. The information comes directly from the ledger and the total debit and credit balances must be equal. Some errors could exist even if debits are equal to credits, such as double posting or failure to reco rd a transaction. Step five is to enter the unadjusted trial balance and complete the worksheet. While this step is optional, it displays the information in a way which can make it easier to work with. Step six in the accounting cycle is to journalize and post the adjusting entries. Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of the accounting period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been earned but not entered in the books. Adjusting entries are prepared to update the accounts before they are summarized in the financial statements. Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method),