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Companies must ensure that their financial records are accurate, up-to-date and in accordance with accepted accounting principles. You can reach this goal by using the accounting cycle. So, what does that involve accounting cycle? Lets break it down on a step by step …
1) Analyze
The first step is to analyze all transactions from the past year and to locate and file relevant documents for them.
2) General Journal
Next, it is necessary to create a central record of all of the transactions. This record is referred to as a General Journal.
3) Posting
Following the journalizing of transactions, they are then transferred and posted to the general ledger. This paper / electronic trail is important to verify the accuracy and, if accounts are found not to refer to later as compensation.
4) The Unadjusted Trial Balance
The next step is to add up the debit and credit balances as they are equal. Information is from the general ledger which may be can be compiled to create the financial statements.
5) Adjusting
Having recorded and reviewed external transactions (such as utility payments and supply purchases), internal transactions (such as unearned revenue and prepaid rent) must now be taken in.
6) The Adjusted Trial Balance
The preparation of the adjusted balance is the next project, which includes all internal and external trade for the period. Again, accuracy is verified by ensuring credit and debit amounts are equal.
7) Business Financial Statements
At this stage, a number of important financial statements are created. The Income Statement and Statement of Owner’s Equity first, followed by the Balance Sheet.
Closing Of The Trial Balance
Meanwhile, make permanent the temporary account balances to the next period it will be closed. Closing entries are recorded, posted to the capital account of the business. In the past, all funds (revenue, expenses, and withdrawal) will need to zero.
9) Post-Closing Trial Balance
Finally, comes after the closing balance, which lists the account balances that are close (such as obligations, assets, and equity). This balance helps verify that the permanent balance of accounts (ie have equal debit and credit amounts) and temporarily closed all the accounts properly.
It is important that entrepreneurs understand the steps involved in this cycle of financial reporting. You are ultimately responsible for any errors in their finances, know what is expected of them is legally meaningful. It would be a mistake if they try to cut costs by using their own accounting, as mistakes are made is not only expensive but could also land them in trouble with the Inland Revenue.