Running head: ACC 201 MODULE TWO SHORT PAPER 1

ACC 201 Module Two Short Paper: The Accounting Cycle

Alex Brown

Southern New Hampshire University

ACC 201 Module Two Short Paper 2

The following paper will go over the importance of the accounting cycle, its outputs,

along with the ten steps that make up the cycle. The accounting cycle is a key accounting tool,

and if it isn’t properly followed then there can be many errors whilst recording information into a

journal. To be precise, the accounting cycle is a collective process of identifying, analyzing, and

recording the accounting events of a company. The series of steps begin when a transaction

occurs and end with its inclusion in the financial statements.

From start to finish, the accounting cycle includes ten steps that analyze and journalize

information that ends up in a post-closing trial balance (Carl S. Warren, James M. Reeve,

Jonathan E. Duchac, 2017). Step 1 is to analyze and record transactions into a journal. This step

is where information must be carefully read to determine if a transaction is an asset, liability,

common stock, retained earnings, revenue, dividend, or expense. For each account it must be

determined whether its amount increases or decreases. Increases and decreases should be

recorded as a credit or debit ahead of being able to journalize the transaction. Step 2 is to post

transactions to the general ledger. All of the transaction details (e.g. date, amount, journal page

number, account number) have to be entered into the account, with transactions being entered in

the order that they occur. In step 3 the unadjusted trial balance should be prepared to determine if

any errors have been made in the ledger when posting debits and credit. The unadjusted trial

balance does not provide clear accurate information in the ledger and only shows that the debit

and credit are equal. If the totals in the trial balance are not equal, then there has been an error

and it must be resolved. Step 4 is the assembling and analyzing of adjustment data. This occurs

when accounts must be updated before the preparation of financial statements. Expense accounts

such as accrued expenses and prepaid expenses, as well as revenues such as accrued and

unearned would usually need adjusting. Fixed assets except for land must be adjusted for
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depreciation. Preparing an optional end of period spreadsheet is step number 5. This step is not

absolutely necessary, however, it may give a better idea as to how one goes from an unadjusted

trial balance to an adjusted trial balance (Carl S. Warren, James M. Reeve, Jonathan E. Duchac,

2017). This step can also help to discover any potentially significant adjustments. Step 6 is

journalizing and posting adjusting entries, which occurs through the posting of adjustments that

effect an account in the financial statements. Step 7 is the preparing of an adjusted trial balance.

Financial statements can be prepared once accounts are up to date and balanced. If the adjusted

trial balance is not equal, then there has been an error and it must be resolved. The preparation

of financial statements is step number 8. The statements are completed in the order of, firstly, the

income statement, followed by the retained earnings, and then the balance sheet. The statement

can go back to steps 2, 3, and 5 and be developed from the adjusted trial balance, ledger, or the

end of period spreadsheet. The statements all support each other- for example net income/loss

on the income statement is a line within the retained earnings statement. Step 9 is journalizing

and posting closing entries, of which there are four points. First is to debit each revenue account

for its balance, and to credit the income summary for the total revenue. Second is to credit each

expense account for its balance and debit income summary the total expenses. Third is to debit

the income summary its balance and credit the retained earnings statement. Fourth is to debit the

retained earnings account for the dividends account balance and credit the dividends account.

Step number 10 in the accounting cycle is the preparation of a post-closing trial balance. In this

step, the post-closing balance consists of only assets, liabilities, and the owner’s equity. The

balance shows that everything has been properly entered in a journal and correctly posted.

The major products of the cycle are the income statement, the balance sheet, and the

statement of retained earnings. The income statement is developed from the revenue and
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expense transactions for the current period that has been inputted into the journal. This output is

prepared from the adjusted trial balance. The balance sheet product shows assets, liabilities, and

equity. The balance sheet is more of a snap shot of a certain period, unlike the more continuous

picture given by the income statement. Finally, the retained earnings statement shows earnings

from the net income that the company chooses to keep then distribute among its shareholders.

The accounting cycle is useful for businesses as it lets them track the flow of value

through e.g. expenses, assets, liabilities, and revenue, to name but a few accounts. While the

cycle may seem long and complex, it’s helpful as it paints a picture of the financial health of the

company. Smaller companies in particular can use the accounting cycle to give clearer views for

management on how their position in the market may change, which can be particularly helpful

for situations where they may lack the economies of scale of large accounting firms, e.g.

manpower and technology.

To conclude, the accounting cycle can be used by any company to monitor their growth

and failures, in a clear and auditable fashion. If carried out properly, these steps can ensure that

no errors are made and that a fair picture is given of the company’s financial health.
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Reference

Warren, C.S., Reeve, J. M., & Duchac, J. (2017). Corporate financial accounting (14th ed.).

Boston, MA: Cengage Learning.