Accounting Cycle – Steps During the Accounting Period

These accounting cycle steps occur during the accounting period, as each transaction occurs:

1. Identify the transaction through an original source document (such as an invoice, receipt , cancelled check, time card, deposit slip, purchase order) which provides:

   • Date,amount, description (account or business purpose), name & address of other party (if practical)

2. Analyze the transaction – determine which accounts are affected, how (increase or decrease), & how much

3. Make Journal entries – record the transaction in the journal as both a debit & a credit

4. Post to ledger – transfer the journal entries to ledger accounts

Accounting Cycle: Steps at the end of the accounting period

These accounting cycle steps occur at the end of the accounting period:

1. Trial Balance – this is a calculation to verify the sum of the debits equals the sum of the credits. If they don’t balance, you have to fix the unbalanced trial balance before you go on to the rest of the accounting cycle. (If they do balance you could still have a problem, but at least it balances!)

2. Adjusting entries – prepare & post accrued & deferred items to journals & ledger T-accounts

The following are the most common circumstances that require adjustments:

1. Accrued revenue (for example, interest earned but not yet received); 2. Accrued expense (wage cost incurred but not yet paid); 3. Unearned revenue (earning subscription revenue that had been collected in advance); 4. Prepaid expense (expiration of a prepaid insurance premium); 5. Depreciation (recognizing the cost of a machine as expense spread over its useful economic life); 6. Inv (recording the cost of goods sold on the basis of a period's purchases & the change between beginning & ending Inv balances); 7. Receivables (recognizing bad-debt expenses on the basis of expected uncollected amounts).

3. Adjusted trial balance – make sure the debits still equal the credits after making the period end adjustments

4. Financial Statements – prepare income statement, balance sheet, statement of retained earnings, & statement of cash flows (this can occur at other points in time with appropriate adjustments)

5. Closing entries – prepare & post closing entries to transfer the balances from temporary accounts (such as the revenue & expenses from the income statement to owner’s equity on the balance sheet).

6. After-Closing trial balance – final trial balance after the closing entries to make sure debits still equal credits.

GAAP

Accounting Entity: assumes that the business is separate from its owners or other businesses. Revenue & expense should be kept separate from personal expenses.

Going concern principle. Unless otherwise noted, financial statements are prepared under the assumption that the company will remain in business indefinitely. Therefore, assets do not need to be sold at fire-sale values, & debt does not need to be paid off before maturity. This principle results in the classification of assets & Liab as short-term (current) & long-term. Long-term assets are expected to be held for more than one year. Long-term Liabare not due for more than one year.

Principle of conservatism Relevance, reliability. Accountants must use their judgment to record transactions that require estimation. The № of years that equipment will remain productive & the portion of accounts receivable that will never be paid are examples of items that require estimation. In reporting financial data, accountants follow the principle of conservatism, which requires that the less optimistic estimate be chosen when two estimates are judged to be equally likely.

Monetary Unit principle: assumes a stable currency is going to be the unit of record. The FASB accepts the nominal value of the US Dollar as the monetary unit of record unadjusted for inflation.

Time period assumption. Most businesses exist for long periods of time, so artificial time periods must be used to report the results of business activity. Depending on the type of report, the time period may be a day, a month, a year, or another arbitrary period.

Matching principle. Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the current period (e.g. office salaries & other administrative expenses). This principle allows greater evaluation of actual profitability & performance (shows how much was spent to earn revenue). Depreciation & Cost of Goods Sold are good examples of application of this principle.

Full Disclosure principle. Amount & kinds of info disclosed should be decided based on trade-off analysis as a larger amount of info costs more to prepare & use. Info disclosed should be enough to make a judgment while keeping costs reasonable. Infois presented in the main body of financial statements, in the notes or as supplementary information

Accrual basis accounting. In most cases, GAAP requires the use of accrual basis accounting rather than cash basis accounting. Accrual basis accounting, which adheres to the revenue recognition, matching, & cost principles discussed below, captures the financial aspects of each economic event in the accounting period in which it occurs, regardless of when the cash changes hands. Under cash basis accounting, revenues are recognized only when the company receives cash or its equivalent, & expenses are recognized only when the company pays with cash or its equivalent.

Historical cost principle. Assets are recorded at cost, which equals the value exchanged at the time of their acquisition. In the United States, even if assets such as l& or buildings appreciate in value over time, they are not revalued for financial reporting purposes.

Revenue recognition principle. Revenue is earned & recognized upon product delivery or service completion, without regard to the timing of cash flow. requires companies to record when revenue is (1) realized or realizable & (2) earned, not when cash is received. This way of accounting is called accrual basis accounting.

Consistency principle: It means that the company uses the same accounting principles & methods from year to year.