Page 29 - Encyclopedia of Business and Finance

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Accounting Cycle

the day, the sales of $4,000 for cash would be step. If there should be unequal amounts of debits
recorded in the general journal in this form: and credits or if an account appears to be incorrect,
Cash 4000 the discrepancy or error is investigated and cor-
rected.
Sales 4000
7. Prepare financial statements: Financial statements are
3. Post to general ledger: The general journal entries are prepared using the corrected balances from the
posted to the general ledger, which is organized by adjusted trial balance. These are one of the primary
account. All transactions for the same account are outputs of the financial accounting system.
collected and summarized; for example, the account
titled Sales will accumulate the total value of the 8. Close the accounts: Revenues and expenses are accu-
sales for the period. If posting were done daily, the mulated and reported by period, either a monthly,
Sales account in the ledger would show the total quarterly, or yearly. To prevent their not being
sales for each day as well as the cumulative sales for added to or commingled with revenues and expenses
the period to date. Posting to ledger accounts may of another period, they need to be closed out—that
be less frequent, perhaps at the end of each day, at is, given zero balances—at the end of each period.
Their net balances, which represent the income or
the end of the week, or possibly even at the end of
the month. loss for the period, are transferred into owners’
equity. Once revenue and expense accounts are
4. Prepare an unadjusted trial balance: At the end of the closed, the only accounts that have balances are the
period, double-entry accounting requires that debits asset, liability, and owners’ equity accounts. Their
and credits recorded in the general ledger be equal. balances are carried forward to the next period.
Debit and credit merely signify position—left and
right, respectively. Some accounts normally have 9. Prepare a post-closing trial balance: The purpose of
debit balances (e.g., assets and expenses) and other this final step is two-fold: to determine that all rev-
accounts have credit balances (e.g., liabilities, own- enue and expense accounts have been closed prop-
ers’ equity, and revenues). As transactions are erly and to test the equality of debit and credit
recorded in the general journal and subsequently balances of all the balance sheet accounts, that is,
posted to the ledger, all amounts recorded on the assets, liabilities and owners’ equity.
debit side of accounts (i.e., recorded on the left side)
must equal all amounts recorded on the credit side COMPUTERIZED ACCOUNTING
of accounts (i.e., recorded on the right side). Prepar- SYSTEM
ing an unadjusted trial balance tests the equality of A computerized accounting system saves a great deal of
debits and credits as recorded in the general ledger. time and effort, considerably reduces (if not eliminates)
If unequal amounts of debits and credits are found mathematical errors, and allows for much more timely
in this step, the reason for the inequality is investi- information than does a manual system. In a real-time
gated and corrected before proceeding to the next environment, accounts are accessed and updated immedi-
step. Additionally, this unadjusted trial balance pro- ately to reflect activity, thus combining steps 2 and 3. The
vides the balances of all the accounts that may need to test for equality of debits and credits through trial
require adjustment in the next step. balances is usually not required in a computerized system
5. Prepare adjustments: Period-end adjustments are accounting since most systems test for equality of debit
required to bring accounts to their proper balances and credit amounts as they are entered. If someone were
after considering transactions and/or events not yet to attempt to input data containing an inequality, the sys-
recorded. Under accrual accounting, revenue is tem would not accept the input. Since the computer is
recorded when earned and expenses when incurred. programmed to post amounts to the various accounts and
Thus, an entry may be required at the end of the calculate the new balances as new entries are made, the
period to record revenue that has been earned but possibility of mathematical error is markedly reduced.
not yet recorded on the books. Similarly, an adjust- Computers may also be programmed to record some
ment may be required to record an expense that adjustments automatically at the end of the period. Most
may have been incurred but not yet recorded. software programs are also able to prepare the financial
6. Prepare an adjusted trial balance: As with an unad- statement once it has been determined the account bal-
justed trial balance, this step tests the equality of ances are correct. The closing process at the end of the
debits and credits. However, assets, liabilities, own- period can also be done automatically by the computer.
ers’ equity, revenues, and expenses will reflect the Human judgment is still required to analyze the data
adjustments that have been made in the previous for entry into the computer system correctly. Additionally,

6 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION