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What is the Accounting Cycle

The accounting cycle is performed during the accounting period, to analyze, record, classify, summarize, and report financial information.

1. fig. 1
The General Ledger

The accounting cycle bring information into the general ledger. Key Points

The accounting cycle has 8 Steps. Each transaction must be analyzed to determine whether it qualifies as a business transaction. The accounting cycle runs within the accounting period. The goal of the accounting cycle is to produce financial statements for the company.

Terms

bookkeeping

The skill or practice of keeping books or systematic records of financial transactions, e.g., income and expenses.

summarize

To gi e a recapitulation of the salient facts! to recapitulate or re iew

source

The person, place or thing from which something "information, goods, etc.# comes or is acquired. E amples

$s we walk through the steps of the accounting cycle, consider the following example. $fter a number of years as a successful %&$ at a national firm, you decide to quit the rat race and pursue your true lo e '' yoga. (ou decide that $tlanta)s *irginia'+ighland neighborhood would be the perfect place to open an $shtanga (oga studio. E en better, your friend Solomon, a certified instructor, has ,ust mo ed to town and is willing to teach at the studio. (ou hurriedly prepare to open the studio, +ighland (oga, by -uly ..&re'opening "before -uly .#&rior to opening the business, you make the following transactions/.. (ou contribute 01,222 in cash to start the business.3. (ou purchase 0422 worth of mats and other equipment for use during classes.5. (ou purchase an additional 0122 worth of mats, equipment, and clothing for sale at the studio.1. (ou purchase liability insurance at a total cost of 0.,322. The policy co ers -uly . through 6ecember5..-ulyThe following transactions take place during -uly... (ou recei e cash totaling 0822 for classes.3. (our instructor teaches classes for the month. (ou agree to pay 0722 for the classes! 0522 is paid on -uly .4, and 0522 will be paid on $ugust 5.5. (ou pay rent for -uly of 0.,222 on -uly ..1. (ou use utilities "electricity and water# totaling 0322. This amount is payable on $ugust .4.$ugustThe following transactions take place during $ugust... (ou recei e 0.,422 in cash for classes. 8f this amount, 0.,222 was for classes in $ugust. The remainder is for 3'month passes allowing unlimited classes in $ugust and September.3. (our instructor again earns 0722 teaching classes! 0522 due on $ugust .7 and 0522 on September ..5. 9tilities total 0.42, payable September .4.1. (ou pay rent of 0.,222 on $ugust ..4. (ou sell in entory costing 0.42 for a re enue of 0334.7. (ou are worried about money, so your 9ncle :afael makes you an offer. +e agrees to loan you 03,222 in cash. (ou will need to repay him sometime later, but he doesn)t say when.;. $ client is extremely dissatisfied with their class, and demands their money back. :eluctantly, you agree. The class cost 0.4.8. $fter borrowing money, you decide to withdraw some of your in estment in the studio to pursue other opportunities. (ou decide to withdraw 0.,222.

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The Accounting Cycle

The accounting cycle is a series of steps performed during the accounting period "some throughout the period and some at the end# to analyze, record, classify, summarize, and report useful financial information for the purpose of preparing financial statements. <n bookkeeping, the accounting period is the period for which the books are balanced and the financial statements are prepared. =enerally, the accounting period consists of .3 months. +owe er, the beginning of the accounting period differs according to the company. >or example, one company may use the regular calendar year, -anuary to 6ecember, as the accounting year, while another entity may follow $pril to ?arch as the accounting period.

Eight !teps in the Accounting Cycle

There are eight steps in the accounting cycle and they are as follows/

Analyze transactions by examining source documents. Journalize transactions in the ournal. !ost ournal entries to the accounts in the ledger. !repare a trial balance of the accounts and complete the "orksheet #includes ad usting entries$. !repare financial statements. Journalize and post ad usting entries. Journalize and post closing entries. !repare a post%closing trial balance.

!ource "ocuments
To begin the accounting cycle, it is necessary to understand what constitutes a business transaction. @usiness transactions are measurable e ents that affect the financial condition of a business. @usiness transactions can be the exchange of goods for cash between the business and an external party, such as the sale of a book, or they can in ol e paying salaries to employees. These e ents ha e one fundamental thing in common/ they ha e caused a measurable change in the amounts in the accounting equation, assets A liabilities B stockholdersC equity. The e idence that a business e ent has occurred is a source document. Sales tickets, checks, and in oices are common source documents. Source documents are important because they are the ultimate proof that a business transaction has taken place. $fter determining, ia the source documents, that an e ent is a business transaction, it is then entered into the company books ia a ,ournal entry. $fter all the transactions for the period ha e been entered into the appropriate ,ournals, the ,ournals are posted to the general ledger ">igure .#. The trial balance pro es that the books are in balance or that the debits equal the credits. >rom the trial balance, a company can prepare their financial statements. $fter the financials are prepared, the month end ad,usting and closing entries are recorded ",ournalized# and posted to the appropriate accounts. $fter those entries are made, a post'closing trial balance is run. The post'closing trial balance erifies the debits equal the credits and that all beginning balances for permanent accounts are in place.

#ighland $oga
$s we walk through the steps of the accounting cycle, consider the following example. $fter a number of years as a successful %&$ at a national firm, you decide to quit the rat race and pursue your true lo e '' yoga. (ou decide that $tlanta)s *irginia'+ighland neighborhood would be the perfect place to open an $shtanga (oga studio. E en better, your friend Solomon, a certified instructor, has ,ust mo ed to town and is willing to teach at the studio. (ou hurriedly prepare to open the studio, +ighland (oga, by -uly .. Pre%opening &'efore (uly )* &rior to opening the business, you make the following transactions/ .. (ou contribute 01,222 in cash to start the business. 3. (ou purchase 0422 worth of mats and other equipment for use during classes. 5. (ou purchase an additional 0122 worth of mats, equipment, and clothing for sale at the studio. 1. (ou purchase liability insurance at a total cost of 0.,322. The policy co ers -uly . through 6ecember5.. (uly The following transactions take place during -uly. .. (ou recei e cash totaling 0822 for classes. 3. (our instructor teaches classes for the month. (ou agree to pay 0722 for the classes! 0522 is paid on -uly .4, and 0522 will be paid on $ugust 5. 5. (ou pay rent for -uly of 0.,222 on -uly .. 1. (ou use utilities "electricity and water# totaling 0322. This amount is payable on $ugust .4.

August The following transactions take place during $ugust. .. (ou recei e 0.,422 in cash for classes. 8f this amount, 0.,222 was for classes in $ugust. The remainder is for 3'month passes allowing unlimited classes in $ugust and September. 3. (our instructor again earns 0722 teaching classes! 0522 due on $ugust .7 and 0522 on September .. 5. 9tilities total 0.42, payable September .4. 1. (ou pay rent of 0.,222 on $ugust .. 4. (ou sell in entory costing 0.42 for a re enue of 0334. 7. (ou are worried about money, so your 9ncle :afael makes you an offer. +e agrees to loan you 03,222 in cash. (ou will need to repay him sometime later, but he doesn)t say when. ;. $ client is extremely dissatisfied with their class, and demands their money back. :eluctantly, you agree. The class cost 0.4. 8. $fter borrowing money, you decide to withdraw some of your in estment in the studio to pursue other opportunities. (ou decide to withdraw 0.,222.