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Accounting cycle is a step by step process of recording, classfication and summarization of economic transcation of a business. It generates useful financial statement including income statement of changes in equity. The time period principles required that a business should prepare its financial statement on periodic basis. Therefore accounting cycle is followed once during each accounting period. Accounting cycle starts from the recording of individual transaction and ends on the preparations of financial statement and closing entries. This cycle consist of the folowwing steps.
Analyzing transaction and recording them as journal entries is the first step in the accounting cycle. Transaction analysis is a process which determines whether a particular business event has an economic effect on the "Asssts", "Liabilities", or "Equity" of the business. After analyzing transaction, accountants classify and record theevents having economic effect via journal entriesacording to debit - credit rules. Under the double entry system, every business transaction is recordedin at least two accounts. One account call "DEBIT" entry, meaning the amount will be entered on the left side of the account. Another account called "CREDIT" entry, meaningthe amount will be entered on the right side of that account. The initial challenges with double-entry is to know which account should be debited and which account should be credited.
Ledger meaning a permanent book of record, which contains all account relating to the financial transaction of a business and a account contained in the ledger book. It finally called "LEDGER ACCOUNT". A ledger account is a statement shaped like an alphabet "T" that systematically contains and financia ltransaction relating to either a particular person on thingsfor a certain period of time. A general ledger accounts is an account or record used ro sort and store balance sheet and income statementtransaction. Exampleof ledger accounts are cash, account receivable, inventory, investments, land and equipments. To achieve through the whole process of accounts is to collect all the information related to an element of a singlr place.
Unadjusted trial balance
Trial balance is the thrid step in preparing of financial accounts. It is the listing of general ledger accounts balances at the end of a reporting period, before any adjusting entries are made to the balance to financial statement. This is thestarting point for analyzing accounts balanceand making adjusting entries. If the total of the debt colum does not equal the total values of the credit colum. This would show that there is an error in the nominal ledger accounts. This error must be found before a profit and loss statement and balance sheet can be produced.
Adjusting Entries are usally made on the last day of an accounting period (year, quarter and month) so that the financial statement reflect the revenue that has been earned and the expresses thatwere incurred during accounting period.Sometimes adjusting entries is needed due to revenue has been earned.
Adjusting Entries are made to report : -
Revenue that have been earned but not yet entred into the accounting record.
Express that have been incurred but have not been entered into the accounting records.
Revenue already recorded that involves more then the current accounting period.
Express already recorded that involves more then the current accounting period.
A comman characteristic of an adjusting entries is that it will involve one income statement accounts and one balance sheet account and to be accurate.
Adjusted Trial Balance
An Adjusted Trial Balance is very similar to a regular trial balance. Before preparing official financial statement, a business using the accured methods will record adjusting entries to record accurued estimated or defered amounts. So, the adjusted trial balance is just the trial balance that takes places after adjusting entries are made, in order to ensure thatthey were posted properly. It is also to verify the total at the debit balances in all accounts equals the total of all credit balance.
There are 4 financial statement :-
Cash Flows Statement
The balance sheet is based on the following fundamental accounting model:
Assets Â =Â Liabilities Â +Â Equity
Assets can be classed as either current assets or fixed assets. Current assets are assets that quickly and easily can be converted into cash, sometimes at a discount to the purchase price. Liabilities represent the portion of a firm's assets that are owed to creditors. Liabilities can be classed as short-term liabilities (current) and long-term (non-current) liabilities. Equity is referred to as owner's equity in a sole proprietorship or a partnership, and stockholders' equity or shareholders' equity in a corporation.
The income statement presents the results of the entity's operations during a period of time, such as one year. The simplest equation to describe income is:
Net Income Â = Â Revenue Â - Â Expenses
Revenue refers to inflows from the delivery or manufacture of a product or from the rendering of a service. Expenses are outflows incurred to produce revenue.
Income from operations can be separated from other forms of income. In this case, the income can be described by:
Net Income Â = Â Revenue Â - Â Expenses Â + Â Gains Â - Â Losses
Where gains refer to items such as capital gains, and losses refer to capital losses, losses from natural disasters, etc.
The equity statement explains the changes in retained earnings. Retained earnings appear on the balance sheet and most commonly are influenced by income and dividends. The Statement of Retained Earnings therefore uses information from the Income Statement and provides information to the Balance Sheet.
The following equation describes the equity statement for a sole proprietorship.
Ending Equity Â = Â Beginning Equity Â + Â Investments Â - Â Withdrawals Â + Â Income
Cash Flow Statement
The cash flow statement represents an analysis of all of the transactions of the business, reporting where the firm obtained its cash and what it did with it. It breaks the sources and uses of cash into the following categories:
The information used to construct the cash flow statement comes from the beginning and ending balance sheets for the period and from the income statement for the period.
Closing entriesÂ are thoseÂ journal entriesÂ made in a manual accounting system at the end of an accounting period to shift the balances in temporaryÂ accountsÂ to permanent accounts. Examples of temporary accounts are theÂ revenue,Â expense, andÂ dividendsÂ paid accounts. Any account listed in theÂ balance sheetÂ (except for dividends paid) is a permanent account. A temporary account accumulates balances for a single reporting period, whereas a permanent account stores balances over multiple periods.
For example, a closing entry is to transfer all revenue and expense account totals at the end of a reporting period to an income summary account, which effectively results in the net income or loss for the period being the account balance in the income summary account; then, you shift the balance in the income summary account to theÂ retained earningsÂ account. As a result, the temporary account balances are re-set to zero, so that they can be used again to store period-specific amounts in the following accounting period, while the net income or loss for the period is accumulated in the retained earnings account.
It is also possible to bypass the income summary account and simply shift the balances in all temporary accounts directly into the retained earnings account at the end of the reporting period.
As an another example, you should shift any balance in the dividends paid account to the retained earnings account, which reduces the balance in the retained earnings account. This re-sets the balance in the dividends paid account to zero.
Post - Closing Trial Balance
A post-closing trial balance is a list of balances of ledger accounts prepared afterÂ closing entrieshave been passed and posted to theÂ ledger accounts. Since the closing entries transfer the balances of temporary accounts (i.e.Â expense,revenue, gain, dividend and withdrawal accounts) to the retained earnings account, the new balances of temporary accounts are zero and therefore they are not listed on a post-closing trial balance. However, all the other accounts having non-negative balances are listed including the retained earnings account.
The preparation of post-closing trial balance is the last step of the accounting cycle and its purpose is to be sure that sum of debits equal the sum of credits before the start of new accounting period. It provides the openings balances for the ledger accounts of the new accounting period.
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