The successful operation and financial performance of a company require effective identification, analyzation, and accurate recording of all financial transactions, which describes the accounting cycle in businesses (Warren, 2017). The purpose paper outlines and describes the 10 steps taken in the accounting cycle from the beginning of any financial transaction in a company through the representation of these transactions on the company financial statements, and finally, developing the outputs. The accounting cycle is vital for companies to ensure accurate entries as well as the financial statements, keeping them up to date and balanced, especially in the identification of the owned funding in a company. Hence, effective and efficient management of corporate finances.
The accounting cycle is a process with sequential procedures undertaken in 10 main steps. The first step involves the analysis and recording of financial transactions, which helps identify how economic events affected the financial position and accounts during that period. Secondly, the transactions are journalized while specifying whether they are a debit or credit. Thirdly, the accounts are transferred to the general ledger for accuracy where they are checked for correctness while preparing the unadjusted trial balance (Carl S. Warren, 2011). Fourth, accounts such as the accrued revenue, accrued expenses, and prepaid expenses are adjusted for the confirmation of matching principles. It is in the fifth step that the adjusted trial balance is prepared to enable adequate preparation of the financial statements such as income statement and the balance sheet in step seven. The journalizing and recording of the closing entries transfer data in the financial statements, which is adjusted by posting the closing trail balance in the eighth step allowing for equity and balances between the credits and debits. This is an essential step as it shows the company’s financial performance and health. Finally, reversing any entries eliminates instances of double counting and verify the balances for the coming year (quarter)
The four primary outputs include the income statement, which provides the net gain and loss for the year, and the retained earnings statement that defines the distribution and equity held among shareholders. The balance sheet which captures and displays the owns (assets) and owned (liabilities), and finally, the stockholder equity statement shows the total equity, common stocks, and retained earnings among the stockholders. They all are important as they define a company’s financial health and performance (Carl S. Warren, 2011). They are interrelated through the net income and equity accounts, which reflect the financial performance and picture.
The accounting cycle is one of the most critical tools in the identification of the financial performance of the company, as if any step is omitted, the final results may provide wrong figures that result in information asymmetries. If the preparation of the unadjusted trial balance was overlooked, there is a higher chance of missing accounts in the adjusted trial balance, which means inaccuracies in accounting (Warren, 2017). Financial statements are all essential as they describe the financial performance and health of the company in that year, without the information, the company would not run effectively or know their gains, growth, and productivity. Moreover, if a company does not post the closing entries, the previous year’s issues may affect the next fiscal year performance due to a lack of correct and accurate information, making these steps trivial in the company.
An accounting cycle is a vital tool in every company and business, and it must be conducted accurately and efficiently to enable companies to identify the financial performance and health in the changing business environment. Through the outputs, companies can develop effective strategies to adapt and adjust accordingly.
Carl S. Warren, J. M. (2011). Financial & Managerial Accounting. Boston: Cengage Learning.
Warren, C. R. (2017). Corporate financial accounting (14th ed.). Boston, MA: Cengage Learning.