What are the steps in the accounting process?

Peter Baskerville

The accounting process - Foundation level

This answer will help you to identify all the steps that take place in the accounting
process. Because these steps in the accounting process are repeated every accounting
period they are also referred to as the accounting cycle.

The Accounting Process

Continuous steps taken throughout the accounting period (Steps 1-5)

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 Accounting Process & Cycle

o 1 - Identify that a financial transaction or event has occurred.

o 2 - Prepare the source documents for the transaction. (i.e.receipts,
invoices and checks)
o 3 - Analyze and classify the transaction. Determine; (i) the transaction
amount in monetary terms; (ii) the ledger accounts that are affected by the
transaction; (iii) the account(s) to be debited and the account(s) to be
credited.
o 4 - Record the transaction details into the appropriate journal. A journal
records the debit and credit details of a transaction in a chronological
(date and time) order. It also records the account name and the account
number that is allocated by the chart of accounts. Common journals are;
cash receipts journal, cash payments (dispersement) journal; sales
journal; purchased journal and general journal.
o 5 - Post the details from the journals to the general ledger where all the
accounts are kept. The summary details are transfered (posted) from the
journals to the general ledger. Ledgers are kept by account types. (i.e.
Electricity, Cash, Accounts Payable)

Steps taken at the end of the accounting period

o 6 - Prepare a trail balance. The trial balance lists and summarizes all the
general ledger account balances to ensure that the total of the debit
balances equals the total of the credit balances. The sum total is not
meaningful. The important thing is simply that the totals of both columns
(debits and credits) agree. A balanced trial balance ensures that there
were no recording errors. However, it does not guarantee that
the amounts are correct. (i.e. the right amounts may have been posted to
the wrong accounts). Correct the discrepancies identified from trial
balance if required.
o 7 - Calculate and make adjusting entries in the journals. Adjusting
entries need to be made at the end of each accounting period to match
the revenue earned in that period with the expenses incured in earning it.
These adjustments are called accruals and deferred items in accrual
accounting. These entries are also journalized and posted to the general
ledger. The source document used to record adjusting entries is typically a
10 column worksheet.
o 8 - Prepare an adjusted trial balance. As part of the 10 column
worksheet you will prepare a trial balance of the adjusted entries only. If

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Saylor URL: http://www.saylor.org/courses/bus103/

Attributed to: Peter Baskerville Saylor.org

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 these are in balance (debit entries = credit entries) then a new adjusted
trial balance is compiled as a basis for the financial statements.
o 9 - Prepare the Financial Statements. The two main financial statements
created are (i) the Statement of Financial Performance (Income
Statement) and (ii) the Statement of Financial Position (Balance Sheet)
o 10 - Close the temporary accounts and transfer the balances to Owners
Equity. Temporary accounts are cleared by transferring the the amounts in
them to the income summary account. This account is part of the retained
earnings as reported in the Owners Equity section of the Statement of
Financial Position. Temporary accounts are the revenue, expense,
dividend, owners drawings accounts as well as other gains or losses
made. These temporary accounts begin the next accounting period with a
zero balance.
o 11 - Prepare the after-closing trial balance. The final trial balance is
calculated after the closing entries from the temporary accounts are made.
At this point only the permanent accounts (assets, liabilities and owners
equity) that make up the Statement of Financial Position appear in the
after-closing trial balance.

Steps taken at the start of the next accounting period

12 - Reverse the accrued journal entries. The accruals recorded on the

last day of the previous accounting period, must be reversed on the first
day of the new accounting period. This is done to avoid the possibility of
double entries when the actual transaction (that had previously been
accrued) occurs in the next period.

Source URL: http://knol.google.com/k/what-are-the-steps-in-the-accounting-process#

Saylor URL: http://www.saylor.org/courses/bus103/

Attributed to: Peter Baskerville Saylor.org

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