Accounting Cycle Paper
ACC/421
September 12, 2011

Accounting Cycle Paper
The accounting cycle is very important to maintaining orderly transactions within an organization’s accounting records. Companies can simply not just give and receive money without recording the events that lead to the transaction otherwise they would be faced with a night mare when trying to reconcile their records.

In my company the accounting cycle is used for accounting transactions that affect the comings and goings of money within the organization. This usually begins with a Source Document. Source Documents consist of a description of the accounting transaction, this can be a sales or purchase transaction. Sales transactions in my company are usually performed through the use of a Point of sale system. In a purchase transaction a cash receipt or invoice from the company providing the product or service. Source documents, whether from sales or purchase transactions serve as objective evidence that the transaction did occur and part of the audit trail. Being an early document in the accounting cycle, source documents provide the information required to analyze and classify the transaction in order to be journalized in the accounting system.

The next step in the accounting cycle is to journalize the transactions. In my company this is usually the electronic journal maintained by the Point of sale system, or a purchase order created by a manager at the time a purchase is made. Sales transactions from most point of sale systems are automatically recorded into the general ledger, requiring minimal intervention from accounting personnel, the same applies to most accounts payable transactions that involve inventory purchases. On the other hand, the purchase of supplies and services do require source documents to be entered into the general ledger by accounting personnel.

The General Ledger is where all accounting transactions are posted using a double entry system of credits and debits for each transaction. In a double entry system one transaction impacts at least two separate accounts within the general ledger. For example, in my company sales credit the sales account and debit the cash account. Though my company uses an electronic ledger, ledgers can be either manual or electronic depending on whether computer software is used or the company uses a manual system.

The next step in the accounting cycle is the trial balance. As a rule in double entry accounting, credit and debit must equal. In my days as a bookkeeper for my employer we were required to run a report at the end of the workday, which was basically to check our trial balances. This report would show the sum of every credit and debit entered for the day by us, and if the amounts did not agree we knew something was wrong.

The next step in the accounting cycle is adjusting entries. These entries consist of accruals, prepayments, or estimation of items. In my companies adjusting entries are made the first work day following the close of a month. We do not deal too much with prepayments in my company, as we never pay in advance for a product or service. However, accruals and estimations are common in our accounting activities. We accrue items that have been received, but not yet paid for in my company. A great example of this would be newspapers for resale. Our newspaper vendors do not require us to pay for papers at the time they are received, instead they send us a bill at the end of the month. What we accrue for this product at the end the accounting period is an educated estimate based on days in the month and average number of papers received in a day. When the accruals are entered into the accounting system, they are entered as a type of transaction that will automatically reverse itself and post in the following month to offset the payment of the bill. After all accruals and adjustments are entered, an adjusted trial balance is formulated. The adjusted trial balance shows us what our income and expenses were for the period.

* The step following the adjusted trial balance is statement preparation. This process in my company is almost completely automated, and specific to a manager’s area of responsibility. As managers we have the ability to monitor the progress of our financial statements during the closing process to watch for irregularities or mistakes. If an irregularity or mistake is identified it is to be researched and resolved.

Reference
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate Accounting (12th ed.). Hoboken, NJ: John Wiley & Sons.