The Accounting Cycle
The accounting cycle is a step-by-step procedure of recording and grouping business transactions in order to create financial statements. It involves gathering, processing, and communicating business transactions based on the different categories of business transactions. The accounting cycle shows the primary goal of financial accounting i.e. to develop meaningful financial information in the form of financial statements for general purpose and use. Therefore, the accounting cycle is important to a business in terms of the role it plays in developing general-purpose financial statements. In this regard, the accounting cycle enables a business to keep track of its expenses and revenues based on its different transactions during a specific timeframe.
Since it’s a step-by-step procedure, the accounting cycle is characterized by various steps beginning with identifying and analyzing business transactions that pertain to the business entity (Porter & Norton, 2007). For example, a business transaction could be money spent in purchasing equipment for the operations of the business. This is followed by document the effect of the transaction in a journal entry either on paper or electronically. For example, once the purchase of the equipment is identified, the transaction is recorded in the journal chronologically....
The next step is posting the transaction to the ledger as part of summarizing its effects and preparing a trial balance. In this case, the purchase of the equipment is posted in the worksheet containing the business’ financial information. The next step is preparing financial statements through making adjusting entries and closing the books.
The accounting cycle produces different financial statements including a balance sheet, income statement, statement of cash flows, and statement of owner’s equity. A balance sheet is important to a business since it provides information regarding a business’ total assets and their financing either through equity or debt. On the other hand, an income statement is significant since it provides details about a business’ financial performance within a specific financial period. A statement of cash flows is significant since it indicates how much cash is generated and spent during a specific time period while a statement of owner’s equity is important because it shows changes in a company’s capital or equity over time. These financial statements generated from the accounting cycle are used to determine and indicate the financial health and status of a business in line with its operations and transactions.
Reference
Porter, G.A. & Norton, C.L. (2007).…
