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The accounting cycle

Simple Alliance, Kenya Limited

The cycle of accounting practices and accounting concepts

Accounting practices take the form of activities that run from the moment a transaction takes place and ends during the books closure. Since the process repeats itself every financial year it is referred to as the accounting cycle or the bookkeeping cycle. It encompasses a series of accounting concepts which are carried out in nine steps: 

  • Collecting and analysing data from transactions and events.
  • Putting transactions into the general journal.
  • Posting entries to the general ledger.
  • Preparing an unadjusted trial balance.
  • Adjusting entries appropriately.
  • Preparing an adjusted trial balance.
  • Organizing the accounts into the financial statements.
  • Closing the books.
  • Preparing a post-closing trial balance to check the accounts

Collecting and analysing data from transactions events

This step helps you analyse a transaction and its source documents and through applying double-entry accounting you get to determine the transactions effect on your account balances.

Putting transactions into the general journal

The recording of all transactions in a central journal helps eliminate mistakes and also makes it easy to link the debits and credits for each transaction.

Posting entries to the general ledger

Transferring transaction information to a ledger works to verify accuracy. It also helps in troubleshooting just in case the accounts do not add up in future. It is important to leave this paper trail otherwise known as electronic train in computerised accounting.

Preparing an unadjusted trial balance

This stage checks account balances and point out to the errors that might have occurred during the first three stages. The sums of debit and credit recorded during the double-entry account should match, if they don’t then there must have been an error somewhere. By compiling the information recorded in the ledger the unadjusted trial balance processes it for use in preparing financial statements. The account balance is identified from the ledger and recorded in the same order as the chart of accounts. Debit and credit balances should be equal when totalled.

Adjusting entries appropriately

This stage involves the adjustment of accounts for internal accounts unlike the first four stages that concentrate on external transactions. It adjusts accounts for internal transactions which may include prepaid rent or unearned revenue.

Preparing an adjusted trial balance

It encompasses both the internal and external transactions in preparation for the reporting period. Again the accuracy of the accounts is checked at this point by ensuring that the sums of the credit and debit accounts are equal.

Organizing the accounts into the financial statements

The preparation of business financial statements is facilitated by the adjusted trial balance from where information is pulled out. A number of important financial statements are created which include the income statement and the statement of Owners’ Equity. Information pulled from the Owner’s Equity then helps in the creation of a balance sheet. The information obtained may be used to create a number of other spread sheets and summaries depending on how you want to use them.

Closing the books

At this stage you start preparing for the next financial year by closing temporary or nominal accounts and carrying forward balances on the real or permanent accounts. To ensure that all information from the financial statements is at hand, most accountants and bookkeepers create a worksheet that assists in closing.

Closing entries are recorded and posted to the owner's capital account after they are transferred to the income summary account. Once completed, all revenue, expense, withdrawal and Income Summary balances should be zero.

Preparing a post-closing trial balance to check the accounts

In this last stage, all the balances for the accounts that were not closed are listed. These are the balances for accounts such as assets, liabilities and the Owner’s Equity.  Through this the permanent accounts balance is verified with equal credit and debit sums.  It also verifies that all temporary accounts were properly closed.

The accounting cycle is a process that a business owner has to go through in every financial year. It helps him or her verify the accounts and eliminates any errors that may occur during account balancing. It also helps give him or her right footing from where to start the next financial period. The cycle starts at the transaction stage by analysis followed by postings into ledger accounts, preparation of unadjusted and adjusted accounts, preparation of financial statements and finally the closure of accounts and subsequent post closure analysis.

Copyright (C) 2016, Simple Alliance Kenya Limited

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