Completing the Accounting Cycle

The steps in the accounting cycle include:
1. record the transaction
2. create a journal entry
3. post the journal entry to the individual accounts
4. prepare the trial balance of the balances in the accounts
5. review for adjustments needed
6. propose and post adjusting journal entries
7. create financial statements from adjusted trial balance
8. close out the nominal accounts to retained earnings

Each step provides a vital step in accumulating, summarizing, reviewing and perfecting the reported amounts and preparing accounts for the next period's transactions. Step 1collects the data, steps 2 & 3 organize the data by account, step 4 and 5 summarize and review the data for correctness, step 6 makes sure the data are in compliance with accrual accounting and have not missed anything, step 7 reports summaries of the transactions to stakeholders and step 8 prepares accounts for next period's transactions.

If you do not record a transaction, you will miss some business activity. If you fail to post or fail to adjust account in compliance with GAAP rules, you will have incorrect balances or missing amounts (debits do not match credits). Financial statements will be wrong, out of balance and misleading.

Therefore, it is important that complete each step diligently so that all transactions are recorded, you record the impact of all events and not just part of them, you post all events to the correct accounts, you summarize and review to ensure accrual basis work that has expenses matched with revenues, and you close the nominal accounts out at the end of the period so the prior period transactions are not co-mingled with the next period's activity.

http://www.dummies.com/how-to/content/the-eight-steps-of-the-accounting-cycle.html

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