AB 114 UNIT 9 Accounting cycle

Accounting Cycle

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Accounting Cycle

Accounting can be described as the as the measurement and reporting in monetary terms of inflow and outflow of resources of an organization (Welsch & Anthony, 1981).Accounting enables an organization to make informed decision because it involves identifying, measuring and reporting or economic position or information of an organization while accounting cycle is a series of steps that take place over a given period of time with each step beginning with and ending with the same step in the process.

According to Welch and Chesley (1990) there are nine stages for an accounting cycle to be completed. The first activity to be done in an accounting cycle is to identify the source of information. The source documents are important because all activities, events and transactions are recorded therein. This stage plays a very crucial role and the success of the other subsequent stages depends on it; if the source of information is faulty or questionable it will have a direct bearing on the other stages also. Some documents that are important for consideration include; purchase orders, cheques, bank statements, deposit slip and sales invoice.

Once the authenticity of the documents has been ascertained the next step is journalizing; data is recorded in a primary book called a journal. There are two types of journals; general journal and proper journal (Welch& Chesley, 1990). General journal is one that records all daily transactions such as sales and payments while the journal proper records special events. For proper recording of a journal it is divided into columns; date when the transaction took place, what exactly happened? Ledge folio used, the debit side and finally the credit side.

The third stage is the posting stage. At this phase the information is transferred from the primary book, which is the journal, to the ledger account. The ledger is divided into two equal parts; the left hand side which is the receiving side known as the debit side and the right hand side known as the credit side. The debit side is used to record transactions when receiving while the credit side while giving.

Preparation of an adjusted trial balance is the fourth stage. It list all accounts and their balances with the information obtained from the ledger. According to Tulsian (1970) the main aims of the trial balance is that; it helps in the preparation of the final account, it helps to identify errors and it also makes sure that the ledger account is arithmetically accurate. Doing all these is not as easy as it seems especially when it comes to locating errors. Some errors such as error of omission, compensating error and error of principle can be hard to locate because they don’t affect the trial balance. To solve this problem one might consider creating as suspense account to unearth errors and fraud or may choose to rotate the account clerks to control the unwanted practices. A trial balance must ensure that the two sides add up; the debit side is equal to the credit side and this is to ensure that there are no arithmetic errors.

Preparing adjusting entries is the fifth stage of the accounting cycle. Adjustment to entries is done at the end of every accounting period. It is based on the matching principle and the recognition principle of accounting. The recognition principle states that the revenue be assigned to period it was earned while the matching principle states that revenue and expenses should match.

Adjusted trial balance is the next stage. This is made after the adjustments have been made to the entries. The trial balance is used to check if the debt equals the credit and to prepare financial statements.

After preparation of the adjusted trial balance the next step is to prepare an income statement. This is meant to show all the operations during an accounting period. It is also called trading, profit and loss account and it is divided into two segments .The trading segment which is concerned with ascertaining the gross margin from the trading activities while the profit and loss segment is concerned with ascertaining the net profit and net loss after looking at all the expenses and incomes in an accounting period.

The eighth step is to prepare a closing entry and these are done after the income statement has been prepared. The purpose of this stage is to prepare for the next period of accounting .It is an exercise of getting books ready to record transactions and events for the next season.

Preparation of the balance sheet is the last stage of the accounting cycle. According to Tulsian (1970) it is called a balance sheet because it balances the ledger accounts which have not been close in the income statement. At any given period a balance will clearly outline the assets and liabilities of a company. There are several formats used in the preparation of a balance sheet but the reason for preparation are always the same; to ascertain the level and value of assets and liabilities and to look at the solvency of an organization.

In conclusion, I must say here that there are inconsistencies as it relates to how many stages are there in an accounting cycle. There are those who say there are only three stages while there are others who hold the view that the stages to complete an accounting cycle are nine. And certainly this inconsistencies are not helping those in the profession.

Reference

Tulsian, P.C; (1970), Accounting For C A Foundation, 3rd Ed. India

Welsch, G.A. and Antony, R.N (1981), Fundamentals of Financial Accounting, 3 rd Ed. Richard D. Irwin, Inc Homewood, Illinois, U.S.A.

Welsch, G.A. and Chesley, R.G (1990) Fundamentals of Financial Accounting, Richard D. Irwin Inc. U.S.A