Accounting Cycle Report

Accounting Cycle

Accounting cycle means the collective process that involves the collection and processing of accounting activities within an organization. According to Fleury (2015), a series of steps in the accounting cycle occur as soon as a transaction occurs and end when the transaction is included in financial statements. Accounting cycles ensure the accuracy and suitability of existing commercial accounts in a targeted manner and reduce potential errors. The importance of strictly following the sequence of steps cannot be overemphasized, because omissions in the process can seriously affect the outcome of the process, leading to errors and inaccuracies. This paper highlights the steps of the accounting cycle, the omission of an action and its repercussions as well as the resulting financial statements at the end of the period.

The Beginning of the Sequence

“The accounting cycle encompasses ten essential steps” (Fleury, 2015). The first step is beginning the sequence using the initial account balances. This approach involves the use of records of transactions to start the accounting process. This is the basis of accounting because the absence of the beginning balances mean that the cycle cannot begin.

Journalizing and Analysis of Transactions

The second step is journalizing and analysis of transactions as they occur. Here, the entries derived from invoices, sales and the completion of various economic activities are recorded in accounting journals purposefully as evidence of the actual occurrence of an economic event.

Posting Journal Entries

The third step encompasses posting the journal entries to the accounts. In this phase, journal information is transferred to the ledger, and this ensures the establishment of a complete record of all transactions, the creation of statements and indicates changes in each account based on previous transactions.

Computing Unadjusted Balances

The fourth stage is computing of unadjusted balances for each account where the totals for debit and credit balances must match. The purpose of this strategy is to test the equality of total debits and credits.

Entering Unadjusted Trial Balances

The fifth phase involves entering unadjusted trial balances to the worksheet which is an optional approach for easing the process of entry adjustment.

Journalizing and Posting Adjusting Entries

The sixth step is journalizing and posting adjusting entries which is done to ensure that the revenue recognition and matching guidelines are monitored.

Preparation of Adjusted Trial Balances

Afterwards, the seventh step includes preparation of adjusted trial balances which is an essential prerequisite for the creation of income statements and balance sheet.

Preparation of Financial Statements

“The eighth phase is the preparation of financial statements including cash flow statements, income statements, balance sheets and statement of retained earnings calculated from adjusted trial balances.

Journalizing and Posting Closing Entries

The ninth phase is journalizing and posting the closing entries where closing entries of temporary accounts are moves to the permanent balance sheet.

Preparation of Post-Closing Trial Balance

Finally, the last step is the preparation of post-closing trial balance which is crucial for testing accuracy and ensuring that the debits and credits remain equal” (Nobles, Mattison, & Matsumura, 2014).

Consequences of Omission

The omission of a step is likely to cause grave consequences to the accounting process hence adversely affecting the firm’s success. Each level is a prerequisite of the other and missing one can lead to inaccuracies. For instance, the omission of the fourth stage involving computation of unadjusted balances loses the detection of errors such as mismatching debits and credits. Likewise, failure to prepare adjusted trial balances (step 7) dramatically affects the accuracy of and extent of financial statement preparation. Also, skipping the tenth stage of preparing post-closing trial balances increases the risk of a debit-credit mismatch.

Financial Statements

“The principal financial statements include the income statement, balance sheets and the statement of retained earnings”(Nobles, Mattison, & Matsumura, 2014). The income statement highlights revenues and expenses while the report of retained earnings provides the retained revenue based on beginning earning and profit, losses or dividends. Also, the balance sheet offers information regarding the assets which is cumulative of liabilities and equity. All these financial statements provide current information about the inflow and outflow of cash for all economic activities within a particular accounting period. This information is essential in decision-making as well as planning for company undertakings successfully (Fleury, 2015).

Conclusion

In a nutshell, the accounting cycle is essential for businesses to track transactions and consolidate financial information. Each step is a prerequisite for the succeeding phase, and it is paramount to follow all the steps diligently. The accuracy of the following task depends on the precision of the preceding one hence the need to avoid omission and ensure correction of errors along the continuum of the cycle.

References

Fleury, M. (2015, February 24). Basic Accounting: The Accounting Cycle Explained. Retrieved from Ignite Spot Accounting: http://blog.ignitespot.com/basic-accounting-the-accounting-cycle-explained

Nobles, T. L., Mattison, B. L., & Matsumura, E. M. (2014). Horngren’s financial and managerial accounting (4th ed.). Upper Saddle River, NJ: Pearson Education, Inc.