Accounting Basics: The Accounting Process
  1. Accounting Basics: Introduction
  2. Accounting Basics: History Of Accounting
  3. Accounting Basics: Branches Of Accounting
  4. Accounting Basics: The Basics
  5. Accounting Basics: The Accounting Process
  6. Accounting Basics: Financial Statements
  7. Accounting Basics: Financial Reporting

Accounting Basics: The Accounting Process

By Bob Schneider

As implied earlier, today's electronic accounting systems tend to obscure the traditional forms of the accounting cycle. Nevertheless, the same basic process that bookkeepers and accountants used to perform by hand are present in today's accounting software. Here are the steps in the accounting cycle:

(1) Identify the transaction from source documents, like purchase orders, loan agreements, invoices, etc.

(2) Record the transaction as a journal entry (see the Double-Entry Bookkeeping Section above).

(3) Post the entry in the individual accounts in ledgers. Traditionally, the accounts have been represented as Ts, or so-called T-accounts, with debits on the left and credits on the right.



(4) At the end of the reporting period (usually the end of the month), create a preliminary trial balance of all the accounts by (a) netting all the debits and credits in each account to calculate their balances and (b) totaling all the left-side (i.e, debit) balances and right-side (i.e., credit) balances. The two columns should be equal.

(5) Make additional adjusting entries that are not generated through specific source documents. For example, depreciation expense is periodically recorded for items like equipment to account for the use of the asset and the loss of its value over time.

(6) Create an adjusted trial balance of the accounts. Once again, the left-side and right-side entries - i.e. debits and credits - must total to the same amount. (To learn more see, Fundamental Analysis: The Balance Sheet.)

(7) Combine the sums in the various accounts and present them in financial statements created for both internal and external use.

(8) Close the books for the current month by recording the necessary reversing entries to start fresh in the new period (usually the next month).

Nearly all companies create end-of-year financial reports, and a new set of books is begun each year. Depending on the nature of the company and its size, financial reports can be prepared at much more frequent (even daily) intervals. The SEC requires public companies to file financial reports on both a quarterly and yearly basis.
Accounting Basics: Financial Statements

  1. Accounting Basics: Introduction
  2. Accounting Basics: History Of Accounting
  3. Accounting Basics: Branches Of Accounting
  4. Accounting Basics: The Basics
  5. Accounting Basics: The Accounting Process
  6. Accounting Basics: Financial Statements
  7. Accounting Basics: Financial Reporting
RELATED TERMS
  1. Double Entry

    The fundamental concept underlying present-day bookkeeping and ...
  2. Debit

    An accounting entry that results in either an increase in assets ...
  3. Account Activity

    A banking term that refers to any activity that creates a debit ...
  4. General Ledger

    A company's main accounting records. A general ledger is a complete ...
  5. Closing Entry

    A journal entry made at the end of the accounting period. The ...
  6. Trial Balance

    A bookkeeping worksheet in which the balances of all ledgers ...
RELATED FAQS
  1. How do you calculate credits and debits in the general ledger?

    Know the key points when balancing a ledger and why it's essential to understand the relationship between credits and debits ... Read Answer >>
  2. How can I use Excel as my business's general ledger?

    Follow these steps to set up a general ledger accounting system in Excel. A small business can use Excel as a substitute ... Read Answer >>
  3. What's the difference between a trial balance and an adjusted trial balance?

    See the difference between a trial balance and an adjusted trial balance, and understand the importance of making the appropriate ... Read Answer >>
  4. What is double entry bookkeeping and how does it work in the general ledger?

    Learn about the double entry method of bookkeeping and how it works in the general ledger. Every accounting transaction has ... Read Answer >>
  5. What's the difference between a trial balance and a balance sheet?

    Discover what is included in a trial balance and a balance sheet, and learn about what sets these two accounting reports ... Read Answer >>
  6. What happens when my bank account is debited?

    Understand the process that takes place when your account is debited. A debit to your account happens when you use funds ... Read Answer >>

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