Using The Accounting Cycle For Security And Accuracy

There are generally nine steps in the accounting cycle.They are identifying the transaction, analyzing the transaction, putting the transaction in a journal, posting it to a ledger, creating a trial balance, adjusting the entries, adjusting the trial balance, preparing financial statements, and closing the entries.These steps apply to accounting using a double ledger system where all entries are written as a debit and a credit.

Obviously, if the transaction is not identified as such, it will not be put into the system.So it is important to know when a transaction takes place and to record it appropriately in your system.

Once it has been decided that a transaction has happened, the transaction must be analyzed.The business must decide what kind of transaction it was and which accounts were affected by it.
Knowing what the accounts were, allows the transaction to be put into a journal.This journal is the beginning of the paper trail or the electronic trail if the company is using a computerized accounting system.By journaling the transaction, the company can use the results of this step in future to check for any errors that may have occurred.

Once in a journal, transactions are ready to be put into the ledger.It must be put on both sides of the ledger as a credit and a debit in order for the ledger to balance.It should also be put in the correct form in the ledger, so the transactions can be properly reflected in the reporting documents.

The trial balance makes sure that all entries were recorded correctly.If the debit and credit transactions do not equal out, that means that there was some kind of error that crept into one of the previous four steps. This first trial balance only includes the external transactions that a company makes.

Adjusting entries is the next step.This is for all of those transactions that are internal like prepaid rent or unearned revenue.

Adjusting the trial balance at this point will check all of the balances involved in a company's balance sheet including internal and external transactions.If the debits and credits equal each other, then there are no errors in the ledger.If they do not equal, an error has been made.

Once the trial balance has been adjusted and the credits and debits match, the company's financial statements can be made.Many of the statements that are made will depend on the company's need.A couple of common financial statements are the Statement of Owner's Equity and the Income Statement.From this information, a company's Balance Sheet can be created.

The entries can now be closed, and the ledger can be made ready for the next accounting cycle.Those expenditures and revenues that are recurring can be carried forward as such.

These nine steps in the accounting cycle are made possible by the double entry bookkeeping system have been used in many different countries and for many different needs. This is a proven method that does work well and will be able to help your company improve a number of issues that you may be having.

However, it is clear that without this form of accounting, businesses may still be stuck in the dark ages of financial reckoning which would mean lower profits, lower accountability and greater likelihood of theft and profit loss.By using the appropriate steps, the business will be able to safeguard itself from overspending and random mathematical errors that people are given to making.This system should make every business owner feel secure in his or her accounting procedures.