Accounting Cycle

Nelson L Romeu

ACC/421

University of Phoenix

March 5, 2012
Prof. Dawn Brauer

Accounting Cycle

The accounting cycle is a logical process used to help achieve the basic function of accounting, which is to identify, record, and correspond information. A business or organization may have its own unique way of performing its accounting cycle, but each must perform the task in one way or another. ADCON (Administration and Accounting) is a small-operated business with a very simplified description of the accounting cycle. The company began and has been operated for most of its 15 years with a couple of individuals and has expanded into a respected company. Gradually over time the accounting cycle has evolved much like business has evolved; the multiple steps have been reduced as technology has simplified the process, “today, most companies use accounting software that processes many of these steps simultaneously” (“What is the accounting cycle?” 2007, para. 3). The accounting cycle consists of: identifying, journalizing, posting, trail balance, adjusted entries, adjusted trial balance, preparing financial statements, closing, post-closing trial balance, reversing entries, and financial statements (Kieso, Weygandt, & Warfield, 2007, Chapter 3). Identifying a transaction or event is the first step in the cycle; businesses engage in various activities on a daily basis, as a result, determining when to record and activity is crucial. Once the activity has been identified as a transaction that must be recorded, then the next step is to journalize the transaction. The journalizing process can be done in a variety of ways; the most common method is the general journal, although some companies keep other special journals. The next step in the accounting cycle is posting, which is “the procedure of transferring journal entries to the ledger accounts” (Kieso et al., 2007, Chapter 3), so that the transactions reflect in the approiate ledger accounts balances. After the transactions from the general journal have passed to the general ledger a trail balance can be performed. The trial balance “lists accounts and their balances at a given time” (Kieso et al., 2007, Chapter 3), which is very helpful in detecing errors that may have occurred during recording or posting. In the event an error is detected or a transaction is missing an adjusting entry is made. Adjusting entries may also be made to update an account, such as prepaid accounts. For instance, a company may have pre-paid insurance that is on its books as an assets, then at the end of the peroid an adjusting entry is made to reflect what is prepaid and what is an expense. Often times a trial balance is done after the adjusting entries are made just to be sure everything is still in balance. At this point in the accounting cycle the financial reports are typcially generated, the most common are the: blanace sheet, income statement, and retained earnings. The accoutning cycle concludes with the closing entries and closing trial balances. The expense and revenue accounts are closed against income summary, which is then closed against retained earnings. Thus preparing the cycle to begin again in the coming period. Technology has changed the workplace and accounting is no exception. Though some of the accountings principles, debits equal credits, may have stood the test of time. The way a company goes about processing their accounting is changing. ADCON Services uses accounting software called Peachtree Quantum that has vastly improved the accounting cycle process. The transactions are recorded in the software’s general journal, if the transaction is out of balance the system will not complete the transaction and prompt you to balance the transaction. Thus eliminating the need for trial balances. Once the transaction is recorded the system automatically posts to proper ledger accounts and also carries the information over to financial statements. If the owner wishes to view how the company is doing, they would simply have to run a financial report by selecting the report and forms option and then selecting the specific report they would like run. Adjusting entries are still necessary, but the accounting cycle has been effectively reduced to: identifying, journalizing, adjusted entries, financial statements, and closing. The accounting cycle is proven to be a systematic system that helps account’s complete their tasks. The role of people and systems in the cycle has changed the way companies perform their accounting cycle; some companies have departments specified for specific tasks of the cycle, whereas ADCON Services has one individual who does the entire process. Nonetheless, all companies have benefited from the advancements in technology and most notably in accounting systems. Accounting systems have expedited the process and given more accurate results, which allows the user to focus on analyzing the information.

References
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate accounting (12th ed.). : John Wiley & Sons.
What is the accounting cycle? (2007). Retrieved from http://blog.accountingcoach.com/accounting-cycle/