The Accounting Cycle

The accounting cycle is a ten step process, starting with collecting data about the original economic event that affects the financial statements, to the final production of the financial statements for the period. Although the best accounting software packages such as QuickBooks Pro Accounting Software, Peachtree Complete Accounting Software, and MYOB Business Essentials handle much of the accounting cycle automatically, such as posting to the general ledger, a thorough grasp of these accounting principles gives business leaders valuable information about the composition of financial statements and how to meet financial goals.

This section covers each step of the accounting cycle listed below. The Accounting Cycle 1). Collecting and Analyzing Data about an Economic Event 2). Recording the transaction in the Accounting Journal 3). Posting from the Accounting Journal to the General Ledger 4). Preparing the Unadjusted Trial Balance 5). Recording Adjusting Entries 6). Preparing the Adjusted Trial Balance 7). Preparing Financial Statements 8). Recording Closing Entries 9). Preparing a Final Trial Balance 10). Recording Reversing Entries

1). Collecting and Analyzing Data about an Economic Event A Source Document provides evidence that an economic event has actually occurred. Examples of source documents include a receipt, an invoice, a depreciation schedule, and a bank statement.

Assets = Liabilities + Owner's Equity

The accounting equation requires that a transaction affect both sides of the equation. Because the financial statements and the accounting cycle center on the accounting equation, the accounting cycle is set up to ensure that any transaction entered affects both sides of the accounting equation. This concept is known as double entry accounting. Any transaction entered on the left side of the equation must also include the right side. For example, an entry to increase an asset account must also increase liabilities, owners equity, or both by the amount of the asset. Every account has a left side and a right side to enter a transaction. In accounting terms, a debit simply means an entry on the left side of an account, and a credit simply means an entry on the right side of an account. Account Title No. Debit Side Credit Side Debits are entries made on the left side of an account column, and a credit is an entry made on the right side of an account column. The concept of a debit and a credit simply allows us to keep the accounting equation in balance without memorizing the process. Debits to the left of the equation, assets, increase the balance, and credits to the right side of the equation, liabilities and owners equity, increase the balance. Similarly, credits to assets decrease the balance, and debits to the right side of the equation also reduce the balance.

By analyzing the economic event, we determine what effect the transaction has on the accounting equation: Debits Indicate Asset Increases Liability Decreases Expenses Credits Indicate Asset Decreases Liability Increases Revenue

Owners Equity Decreases Owners Equity Increases

For example, when Sunny invested $50,000 to start his business, $50,000 increased the cash balance of the business, an asset, and also increased owners equity.

Assets: Cash $50,000

= Liabilities = $0

+ Owners Equity + $50,000

The accounting principle of a debit and a credit keeps the accounting equation in balance: Cash Account Debit Side Credit Side $50,000 Owners Equity Debit Side Credit Side $50,000

2). Recording the Transaction with Accounting Journal Entries in the Accounting Journal

3). Posting from the Accounting Journal to the General Ledger with Sample General Ledger and Journal Entry a). A Look at the Chart of Accounts 4). Preparing the Unadjusted Trial Balance Sheet 5.) Recording Adjusting Entries a). Adjusting Entries Illustrated 6). Preparing the Adjusted Trial Balance Sheet 7.) Preparing Financial Statements a.) Income Statement Example: Preparing Income Statements b.) Creating a balance sheet c.) Prepare cash flow statement

8). Recording Closing Entries 9). Preparing a Final Trial Balance Sheet 10). Recording Reversing Entries

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