The Accounting Process (The Accounting Cycle) The accounting process is a series of activities that begins with a transaction

and ends with the closing of the books. Because this process is repeated each reporting period, it is referred to as the accounting cycle and includes these major steps: 1. Identify the transaction or other recognizable event.

2. Prepare the transaction's source document such as a purchase order or invoice.

3. Analyze and classify the transaction. This step involves quantifying the transaction in monetary terms (e.g. dollars and cents), identifying the accounts that are affected and whether those accounts are to be debited or credited.

4. Record the transaction by making entries in the appropriate journal, such as the sales journal, purchase
journal, cash receipt or disbursement journal, or the general journal. Such entries are made in chronological order.

5. Post general journal entries to the ledger accounts.

__________________ The above steps are performed throughout the accounting period as transactions occur or in periodic batch processes. The following steps are performed at the end of the accounting period:

6. Prepare the trial balance to make sure that debits equal credits. The trial balance is a listing of all of the
ledger accounts, with debits in the left column and credits in the right column. At this point no adjusting entries have been made. The actual sum of each column is not meaningful; what is important is that the sums be equal. Note that while out-of-balance columns indicate a recording error, balanced columns do not guarantee that there are no errors. For example, not recording a transaction or recording it in the wrong account would not cause an imbalance. 7. Correct any discrepancies in the trial balance. If the columns are not in balance, look for math errors, posting errors, and recording errors. Posting errors include: posting of the wrong amount, omitting a posting, posting in the wrong column, or posting more than once.

8. Prepare adjusting entries to record accrued, deferred, and estimated amounts.

9. Post adjusting entries to the ledger accounts. 10.Prepare the adjusted trial balance. This step is similar to the preparation of the unadjusted trial balance, but this time the adjusting entries are included. Correct any errors that may be found.

11.

Prepare the financial statements. Income statement: prepared from the revenue, expenses, gains, and losses. Balance sheet: prepared from the assets, liabilities, and equity accounts. Statement of retained earnings: prepared from net income and dividend information. Cash flow statement: derived from the other financial statements using either the direct or indirect method.

12.

Prepare closing journal entries that close temporary accounts such as revenues, expenses, gains, and losses. These accounts are closed to a temporary income summary account, from which the balance is transferred to the retained earnings account (capital). Any dividend or withdrawal accounts also are closed to capital.

13.Post closing entries to the ledger accounts. 14.Prepare the after-closing trial balance to make sure that debits equal credits. At this point, only the permanent accounts appear since the temporary ones have been closed. Correct any errors.

15.

Prepare reversing journal entries (optional). Reversing journal entries often are used when there has been an accrual or deferral that was recorded as an adjusting entry on the last day of the accounting period. By reversing the adjusting entry, one avoids double counting the amount when the transaction occurs in the next period. A reversing journal entry is recorded on the first day of the new period.

Instead of preparing the financial statements before the closing journal entries, it is possible to prepare them afterwards, using a temporary income summary account to collect the balances of the temporary ledger accounts (revenues, expenses, gains, losses, etc.) when they are closed. The temporary income summary account then would be closed when preparing the financial statements. Accounting period in bookkeeping is the period with reference to which accounting books of any entity are prepared. It is the period for which books are balanced and the financial statements are prepared. Generally, the accounting period consists of 12 months. However the beginning of the accounting period differs according to the jurisdiction. For example one entity may follow the regular calendar year, i.e. January to December as the accounting year, while another entity may follow April to March as the accounting period. Journal 1. Is the book of prime entry. 2. As soon as transaction originates it is recorded in journal 3. Transactions are recorded in order of occurrence i.e. strictly in order of dates. 4. Narration (brief description) is written for each entry. 5. Ledger folio is written 6. Relevant information cannot be ascertained readily e.g. cash in hand can't be found out easily. 7. Final accounts can't be prepared directly from journal. 8. Accuracy of the books can't be tested. 9. Debit and credit amounts of a transaction are recorded in adjacent columns. 10. Journal has two columns one for debit amount another for credit amount. 11. Journal is not balanced. 12. With the computerization of accounting journal may not be used for routine transactions like receipts, purchases, sales etc

Ledger 1. Is the book of final entry. 2. Transactions are posted in the ledger after the same have been recorded in the journal. 3. Transactions are classified according to the nature and are grouped in the concerned accounts. 4. Narration is not required. 5. Folio of the journal or sub-journal is written. 6. Since transactions of particular nature are grouped at one place therefore relevant information can be ascertained. 7. Ledger is the basis of preparing final accounts. 8. Accuracy of the books is tested by means of list of balances. 9. Debit and credit amounts of a transaction are recorded in two different sides of two different accounts. 10. Ledger has two sides: left side is debit side right side is credit side. 11. Every account in the ledger is balanced at appropriate time. 12. Ledger cannot be avoided. However it may be loose leaf ledger or a computerized ledger. But ledger is a must.

Journal Entries After a transaction occurs and a source document is generated, the transaction is analyzed and entries are made in the general journal. A journal is a chronological listing of the firm's transactions, including the amounts, accounts that are affected, and in which direction the accounts are affected. A journal entry takes the following format:

Format of a General Journal Entry Date Accounts mm/dd account to be debited account to be credited Debit Credit xxxx.xx xxxx.xx

In addition to this information, a journal entry may include a short notation that describes the transaction. There also may be a column for a reference number so that the transaction can be tracked through the accounting system. The above format shows the journal entry for a single transaction. Additional transactions would be recorded in the same format directly below the first one, resulting in a time-ordered record. The journal format provides the benefit that all of the transactions are listed in chronological order, and all parts (debits and credits) of each transaction are listed together. Because the journal is where the information from the source document first enters the accounting system, it is known as the book of original entry.

Compound Journal Entries The format shown above has a single entry for the debit and a single entry for the credit. This type of entry is known as a simple journal entry. Sometimes, more than two accounts are affected by a transaction so more than two lines are required. Such a journal entry is know as a compound journal entry and takes the following format:

Format of a Compound General Journal Entry Date Accounts Debit xxxx.xx xxxx.xx xxxx.xx Credit mm/dd account to be debited account to be credited account to be credited

For example, if an expense is incurred in which part of the expense is paid with cash and the remainder placed in accounts payable, then two lines would be used for the credit - one for the cash portion and one for the accounts payable portion. The total of the two credits must be equal to the debit amount. As many accounts as are necessary can be used in this manner, and multiple accounts also can be used for the debit side if needed.

Special Journals The general journal is the main journal for a wide range of transactions. Of these, a business usually finds itself performing some types much more frequently than others. By grouping specific types of transactions into their own special journal, the efficiency and organization of the accounting system can be improved.