The Eight Steps of the Accounting Cycle By Lita Epstein from Bookkeeping For Dummies 8 of 12 in Series: The Essentials

of Accounting Basics As a bookkeeper, you complete your work by completing the tasks of the accounting cycle. Its called a cycle because the accounting workflow is circular: entering transactions, manipulating the transactions through the accounting cycle, closing the books at the end of the accounting period, and then starting the entire cycle again for the next accounting period.

The accounting cycle has eight basic steps, which you can see in the following illustration. These steps are described in the list below.

Transactions

Financial transactions start the process. Transactions can include the sale or return of a product, the purchase of supplies for business activities, or any other financial activity that involves the exchange of the companys assets, the establishment or payoff of a debt, or the deposit from or payout of money to the companys owners.

Journal entries

The transaction is listed in the appropriate journal, maintaining the journals chronological order of transactions. The journal is also known as the book of original entry and is the first place a transaction is listed.

Posting

The transactions are posted to the account that it impacts. These accounts are part of the General Ledger, where you can find a summary of all the businesss accounts.

Trial balance

At the end of the accounting period (which may be a month, quarter, or year depending on a businesss practices), you calculate a trial balance.

Worksheet

Unfortunately, many times your first calculation of the trial balance shows that the books arent in balance. If thats the case, you look for errors and make corrections called adjustments, which are tracked on a worksheet.

Adjustments are also made to account for the depreciation of assets and to adjust for one-time payments (such as insurance) that should be allocated on a monthly basis to more accurately match monthly expenses with monthly revenues. After you make and record adjustments, you take another trial balance to be sure the accounts are in balance.

Adjusting journal entries

You post any corrections needed to the affected accounts once your trial balance shows the accounts will be balanced once the adjustments needed are made to the accounts. You dont need to make adjusting entries until the trial balance process is completed and all needed corrections and adjustments have been identified.

Financial statements

You prepare the balance sheet and income statement using the corrected account balances.

Closing the books

You close the books for the revenue and expense accounts and begin the entire cycle again with zero balances in those accounts.

As a businessperson, you want to be able to gauge your profit or loss on month by month, quarter by quarter, and year by year bases. To do that, Revenue and Expense accounts must start with a zero balance at the beginning of each accounting period. In contrast, you carry over Asset, Liability, and Equity account balances from cycle to cycle. The Accounting Cycle for a Small Business Eight Steps a Small Business Should Take to Complete the Accounting Cycle

From Rosemary Peavler, former About.com Guide Ads: Accounting Small Business Payroll Accounting Accounting Bookkeeping To Start a Small Business Financial Accounting Firm The accounting cycle for a small business begins with establishing the chart of accounts for that business and ends with closing the books for that business at the end of the accounting time period. The accounting cycle is a series of steps that the firm takes every accounting time period in order to take account of its financial transactions.

Here are the steps in the accounting cycle for a small business:

1. Develop the Chart of Accounts for your Small Business

stockfresh When you start a small business, develop a chart of accounts as part of setting up your accounting and bookkeeping system. The chart of accounts is an index of all the accounts where the company files its financial information.

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www.keepsoft.com Your personal financial secretary and advisor. Payroll Accounting System Accounting.TechnologyEvaluation.com Find the Right Accounting Software Free Vendor Comparison & Shortlist! Online Persuasion Course www.teachsales2me.com Get more people to say YES Special May offer - ONLY $2 2. The Source Document in an Accounting Transaction A source document in an accounting transaction is evidence that the transaction has occurred. It should be recorded as a journal entry as soon as possible. Examples are canceled checks, invoices, purchase orders, and other business documents.

3. Accounting Journal Entries When a small business makes a financial transaction, they make a journal entry in their accounting journal in order to record the transaction. There are actually two entries made - one is a debit to the appropriate account and the other is a credit.

4. Construct the General Ledger for your Small Business The general ledger is the main accounting record for your business. All of the business's financial transactions are taken from the general accounting journal and recorded in the general ledger in a summary form.

5. How to Prepare a Trial Balance After you complete your general ledger entries for an accounting cycle, the next step is to prepare a trial balance. A trial balance is the process of totaling the debits and credits from the general ledger to make sure they balance for the accounting period in question.

6. How to Make Adjusting Entries in your Accounting Journals

Adjusting entries are made in your accounting journals at the end of an accounting period. The purpose of adjusting entries is to adjust revenues and expenses to the accounting period in which they actually occurred.

7. Prepare the Financial Statements One of the final steps in the accounting cycle is the preparation of the financial statements. The information from the accounting journal and the general ledger is used to develop the income statement, statement of retained earnings, balance sheet, and statement of cash flows -- in that order. Information from the previous statement is used to develop the next statement.

8. Closing Entries as Part of the Accounting Cycle Closing entries are journal entries made at the end of an accounting cycle to set the balance of temporary accounts to zero to begin the next accounting period. The accounts that are closed are revenue, expense, and drawing accounts. The assets, liabilities, and owner's equity accounts are not closed because their ending balances are the beginning balances for the next accounting period.

REPUBLIC OF THE PHILIPPINES COMMISSION ON AUDIT Commonwealth Avenue, Quezon City, Philippines

CIRCULAR No. 2002-002 Date June 18, 2002

TO : All Heads of National Government Agencies and All Others Concerned

SUBJECT : Prescribing the Manual on the New Government Accounting System (Manual Version) For Use in All National Government Agencies

1.0 Purpose

In line with COA Circular No. 2001-004 dated October 30, 2001, prescribing the New Government Accounting System (NGAS) in all national government agencies effective January 1, 2002, this manual on the NGAS (manual version) is hereby prescribed to ensure the proper accounting of all financial transactions of the National Government.

2.0 The Manual on the NGAS

The NGAS Manual in its manual version is composed of three volumes, namely:

Volume I The Accounting Policies.

It shows the basic features and policies on NGAS, the government accounting plan, discussion on the financial statements and other related records required and the illustrative journal entries.

Volume II The Accounting Books, Records, Forms and Reports.

It contains the various formats of the books of accounts, registries, records, forms and reports including instructions on their use.

Volume III The Chart of Accounts.

It includes the list of accounts and the definitions/ descriptions of each account.

3.0 Saving Clause

Cases not covered by this Circular shall be referred to the Office of the Chairman thru the Government Accounting and FMIS Office, this Commission, for resolution.

4.0 Repealing Clause

This manual replaces the Government Accounting and Auditing Manual (GAAM), Volume II, prescribed under COA Circular No. 91-368, dated December 19, 1991.

Likewise, all other circulars, orders, memoranda and existing rules and regulations inconsistent with the provisions of this Manual are hereby amended/ modified/revoked accordingly.

5.0 Effectivity Clause

This Circular shall take effect immediately.

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Manual on the NEW GOVERNMENT ACCOUNTING SYSTEM for National Government Agencies [ 1.06MB]

VOLUME I - The Accounting Policies VOLUME II - The Accounting Books, Records, Forms and Reports VOLUME III - The Chart of Accounts

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