Accounting Cycle: Meaning & Steps (Part-2)

Welcome to the second part of Accounting Cycle lecture series. On the first part of Accounting Cycle tutorial we discussed on following steps:

Today in this last part we will discuss on these 6 remaining steps. Such as:

  • 6. Worksheet
  • 7. Adjusted Trial Balance
  • 8. Preparing Financial Statements
  • 9. Closing Entries
  • 10. Post Closing Trial Balance
  • 11. Reversing Entries

6. Worksheet:

Accountants from all round the world trend to use some working papers for some analysis or exercising before preparing final statements. Such working papers are very helpful but those are not regarded as Formal Accounting Record. Worksheet, a multiple column working tool but not a permanent accounting record is used by accountants to summarize accounting entries and account balances in the adjustment process and in the time of preparing financial statements. For more detail tutorial on accounting worksheet please follow this tutorial: How to Prepare an Accounting Worksheet

7. Adjusted Trial Balance:

An economic entity again prepares a trial balance from ledger after journalizing and posting all adjusting entries, which is called adjusted trial balance as it is prepared from the adjusting entries. At the end of the accounting period the adjusted trial balance presents the balance of all accounts, including those adjusted. Therefore the adjusted trial balance shows the effects of all financial events that happened during the accounting period.

8. Preparing Financial Statements:

The next step is to prepare financial statement. From the adjusted trial balance an economic entity prepares financial statement. The company usually prepares three financial statements the income statement, the retained earnings statement and the balance sheet. First the income statement is prepared from the revenue and expense accounts. And then the company prepared the retained earnings statement from the retained earnings and dividends accounts and the net income or net loss is appeared in the income statement. And finally the balance sheet is prepared from the asset and liability accounts, the common stock account, and the ending retained earnings balance which is reported in the retained earnings statement.

9. Closing entries:

Closing entries means at end of particular accounting period close the temporary accounts, by journalizing and posting for the future transaction of next accounting period. The closing entries lead the temporary accounts to zero balance preparing the accounts for the next accounting. In the closing process at the end of accounting period a company transfers all of the revenue and expense account balances to Income Summary for computing net income or net loss. The determined net income or net loss is then transferred to the retained earnings statement or owner™s equity statement. Then the entity posts all closing entries to the appropriate general ledger accounts. Company reports the amount in the balance sheet as the ending amount which is reported on the retained earnings statement. The Income Summary account is used only in closing process. For measuring net income or net loss the balances of the temporary account should be zero balance. So at the end of accounting period the temporary accounts which can determined net income or net loss are closed as fixed account do not represent net income.

10. Post-Closing Trial Balance:

After posting the closing entries the company makes another trial balance called the post-closing trial balance, which include only asset, liability, and owners™ equity accounts. A post-closing trial balance is the evidence which proves that the company has accurately journalized and posted the closing entries. It also shows that the accounting equation is in balance at the end of the accounting period.

11. Reversing Entries:

Reversing entries is an optional step of accounting system. Sometimes a company reverses some the adjusting entries after preparing the financial statements and closing the accounts which are called reversing entries. At the beginning of the next accounting period a company makes a reversing entry which is the opposite of the related adjusting entry that made in the previous period.







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