Accounting cycle steps defined, explained and illustrated gas tax in washington state


Historically, when accounting systems existed entirely on paper, transactions entered the system when a bookkeeper hand wrote entries into a journal (or daybook) soon after they occurred. It was and still is important that transactions enter the journal in the order they occur, soon after they occur. As a result, entries in the journal appear in chronological order. In this way, should anyone ask which transactions occurred on a given day, they can turn to the journal for an answer.

Today, with computer based systems, many kinds of transactions enter the journal without involving a bookkeeper or accountant. In retail shops, for instance, "Point-of-Sale" systems scan customer purchases during checkout. One touch of a cash register button print’s the customer receipt and makes the appropriate accounting system journal entries at the same time. The firm can still enter other kinds of transactions into the journal manually, of course. Manuel entry may involve sales people, bookkeepers, or accountants, using an onscreen form on the computer. Example Journal Entries

• At the close of business on 5 September, Grand Corporation holds an Account receivable value of $1,200 from a customer who had earlier purchased goods from Grande "on credit." Grand created the Account receivable by invoicing the customer for $1,200 at the time of purchase.

All of the firms active accounts are in view for the trial balance. During the trial balance period, accountants close temporary accounts, carry out several kinds of error-checking, and correct errors. The Trial Balance Error Check: Does the Sum of Debits Equal the Sum of Credits?

The name trial balance derives from one kind of error-check in this period. By the rules of double-entry accounting, the sum of all debits made during the period must equal the sum of all credits. A mismatch between these sums indicates presence of a transaction error somewhere in the system. Reconciliation and Other Error Checks

The firm performs other kinds of error-checking during this period as well. With the reconciliation process, for instance, they ensure that the firm’s bank cash account balances—as the bank reports them—agree with the firms own accounting system. And, they ensure that the firm’s liability accounts for bank loans agree with the lender’s account statements. Temporary Adjustment Accounts While Searching for the Error Source

When it is clear an error exists somewhere in the system, accountants may create temporary adjusting accounts so as to restore the balance between total debits and total credits immediately. The objective then is to uncover the underlying errors, correct the errors, and close temporary adjusting accounts before the trial balance period ends.

A balance in an Accrued revenue account, for instance, indicates the firm has delivered purchased goods or services to a customer, but the customer has not yet paid and has not yet been billed. Near the end of the trial balance period, the firm will actually bill the customer so that it can move the temporary Accrued revenue balance to another current assets account, such as Accounts receivable, or even Revenues received.

The final steps in the accounting cycle are preparing and publishing the period’s financial reports. Publishing must occur after the accounting period closes, of course, because the published statements cover account activity through the final day of the period. Publishing may not occur, however, until the firm allows time for several kinds of final adjustments and auditing. Note that the time between closing the reporting period and the date the firm authorizes statements for publishing—the the fifth step in the accounting cycle—is called the reporting period.

Moreover, if the actual financial results are likely to be much better, or much worse, than investors and analysts are expecting, corporate officers themselves may signal advance warning to the investment community and to the press. The purpose is to avoid the appearance of misleading the public. In such cases, the firm has good reason to move public expectations closer to the actual results they will soon publish. Four Mandatory Statements

Public companies must obtain an auditor’s opinion on their financial statements before publishing and submitting them to shareholders in an Annual Report, or to regulatory bodies, or governments. To ensure impartiality, the auditor must be an independent third party—hired by the firm, but not working as employees of the audited firm.

Before issuing an opinion, auditors are given access to review the firm’s accounting practices, financial data sources, and account transaction histories. From this, the best possible audit outcome is an auditor’s opinion of Unqualified. This means the auditor fully endorses a positive answer to the above two questions.