Choose two companies and in 1 - 2 paragraphs explain each step of the accounting cycle for each company. Describe at least one transaction that would occur at each company in each of these steps.
Here is some information for you about the accounting cycle:
The primary objectives of the accounting function in an organization are to process financial information and to prepare financial statements at the end of the accounting period. Companies must systematically process financial information and must have staff who prepare financial statements on a monthly, quarterly, and/or annual basis. To meet these primary objectives, a series of steps is required. Collectively these steps are known as the accounting cycle. The steps, applicable to a manual accounting system, are described below. Later, there will be a brief discussion of a computerized processing system.
The Steps of the Cycle
1. Collect and analyze data from transactions and events: As transactions and events related to financial resources occur, they are analyzed with respect to their effect on the financial position of the company. As an example, consider the sales for a day in a retail establishment that are collected on a cash register tape. These sales become inputs into the accounting system. Every organization establishes a chart of accounts that identifies the categories for recording transactions and events. The chart of accounts for the retail establishment mentioned earlier in this paragraph will include Cash and Sales.
2. Journalize transactions: After collecting and analyzing the information obtained in the first step, the information is entered in the general journal, which is called the book of original entry. Journalizing transactions may be done continually, but this step can de done in a batch at the end of the day if data from similar transactions are being sorted and collected, on a cash register tape, for example. At the end of the day, the sales of $4,000 for cash would be recorded in the general journal in this form:
3. Post to general ledger: The general journal entries are posted to the general ledger, which is organized by account. All transactions for the same account are collected and summarized; for example, the account entitled "Sales" will accumulate the total value of the sales for the period. If posting were done daily, the "Sales" account in the ledger would show the total sales for each day as well as the cumulative sales for the period to date. Posting to ledger accounts may be less frequent, perhaps at the end of each day, at the end of the week, or possibly even at the end of the month.
4. Prepare an unadjusted trial balance: At the end of the period, double-entry accounting requires that debits and credits recorded in the general ledger be equal. Debit and credit merely signify position? left and right, respectively. Some accounts normally have debit balances (e.g., assets and expenses) and other accounts have credit balances (e.g., liabilities, owners' equity and revenues). As transactions are recorded in the general journal and subsequently posted to the ledger, all amounts recorded on the debit side of accounts (i.e., recorded on the left side) must equal all amounts recorded on the credit side of accounts (i.e., recorded on the right side). Preparing an unadjusted trial balance tests the equality of debits and credits as recorded in the general ledger. If unequal amounts of debits and credits are found in this step, the reason for the inequality is investigated and corrected before proceeding to the next step. Additionally, this unadjusted trial balance provides the balances of all the accounts that may require adjustment in the next step.
5. Prepare adjustments: Period-end adjustments are required to bring accounts to their proper balances after considering transactions and/or events not yet recorded. Under accrual accounting, revenue is recorded when earned and expenses when incurred. Thus, an entry may be required at the end of the period to record revenue that has been earned but not yet recorded on the books. Similarly, an adjustment may be required to record an expense that may have been incurred but not yet recorded.
6. Prepare an adjusted trial balance: As with an unadjusted trial balance, this step tests the equality of debits and credits. However, assets, liabilities, owners' equity, revenues, and expenses will now reflect the adjustments that have been made in the previous step. If there should be unequal amounts of debits and credits or if an account appears to be incorrect, the discrepancy or error is investigated and corrected.
7. Prepare financial statements: Financial statements are prepared using the corrected balances from the adjusted trial balance. These are one of the primary outputs of the financial accounting system.
8. Close the accounts: Revenues and expenses are accumulated and reported by period, either a monthly, quarterly, or yearly. To prevent their not being added to or comingled with revenues and expenses of another period, they need to be closed out?that is, given zero balances?at the end of each period. Their net balances, which represent the income or loss for the period, are transferred into owners' equity. Once revenue and expense accounts are closed, the only accounts that have balances are the asset, liability, and owners' equity accounts. Their balances are carried forward to the next period.
9. Prepare a post-closing trial balance: The purpose of this final step is two-fold: to determine that all revenue and expense accounts have been closed properly and to test the equality of debit and credit balances of all the balance sheet accounts, that is, assets, liabilities and owners' equity.
Accounting cycle for government:
The steps for generating the financial statements are called: The Accounting Cycle.
The accounting cycle has three important processes or features.
1. There is a start and end in every period or cycle.
2. Details from transactions and events are taken and summarized at increasingly higher levels.
3. Once one finishes one cycle another is started to determine performance in the subsequent cycle or period.
Stated another way, the start is the detailed or transactions and events level and as one moves toward the finish, the level of summarization increases to the point of creating the financial statements and then the process is readied for a new start.
The accounting cycle for both business and government is not totally fixed. Differences can occur depending on different situations. However, there are some differences of note between business and government. The main one is the inclusion of the budget in the governmental cycle and its absence in the business cycle. In business, the cycle starts with journalizing transactions and events, it then allows for adjusting enteries to catch items not recorded, and posts or summarizes the individual journal entries into accounts. For instance, all cash transactions are posted or recored to the cash account. Financial statements are produced and certain accounts (mainly revenue and expenses) are closed so a new cycle can started. A much more detailed picture of the accounting cycle in government is presented.
Although the accounting cycle in government can follow different steps it often includes these for governmental funds and account groups:
1. The budget or financial activities are authorized by the elected body.
2. The budget is entered into the accounting records so that comparisons can be made with the actual results for purposes of control and compliance.
3. Jounral Entries, i.e., debits and credits, are made to record accrual (if appropriate) and collection of revenues; the same for expenditures and any other transactions or events.
4. Expenditures are treated in a special fashion in that purchases are often encumbered, i.e., subtracted from appropriations by category to avoid overspending.
5. Any adjusting entries are made.
6. All entries are posted in order to summarize the accounts.
7. Financial statements are prepared.
8. Closing entries are made to include closing the budget entry, closing all the revenues and expenditures, and closing the encumbrance
To cover the accounting cycle, the reminder of the chapter is divided into several major parts: