![]() ![]() This step takes information from the general ledger and transfers it onto a document showing all account balances, and ensuring that debits and credits for the period balance (debit and credit totals are equal). The fourth step in the process is to prepare an unadjusted trial balance. Figure 1.14 General Ledger in T-Account Form. All of the accounts he used during the period will be shown on the general ledger, not only those accounts impacted by the $200 sale. He will then take the account information and move it to his general ledger. Returning to Supreme Cleaners, Mark identified the accounts needed to represent the $200 sale and recorded them in his journal. As you’ve learned, account balances can be represented visually in the form of T-accounts. Posting takes all transactions from the journal during a period and moves the information to a general ledger, or ledger. The third step in the process is posting journal information to a ledger. He needs to do this process for every transaction occurring during the period.įigure 1.13 includes information such as the date of the transaction, the accounts required in the journal entry, and columns for debits and credits. He needs to choose what accounts represent this transaction, whether or not this transaction will increase or decreases the accounts, and how that impacts the accounting equation before he can record the transaction in his journal. Mark Summers needs to record this $200 in his financial records. ![]() A journal (also known as the book of original entry or general journal) is a record of all transactions.įor example, in the previous transaction, Supreme Cleaners had the invoice for $200. The information to record a transaction comes from an original source. A transaction is a business activity or event that has an effect on financial information presented on financial statements. This takes analyzed data from step 1 and organizes it into a comprehensive record of every company transaction. The second step in the process is recording transactions to a journal. This sales receipt is an original source containing financial information that creates a business transaction for the company. This sales receipt contains information such as how much the customer owes, payment terms, and dates. He generates an invoice for $200, the amount the customer owes, so he can be paid for the service. Let’s say that Mark Summers of Supreme Cleaners provides cleaning services to a customer. Once the original source has been identified, the company will analyze the information to see how it influences financial records. Activities would include paying an employee, selling products, providing a service, collecting cash, borrowing money, and issuing stock to company owners. ![]() For example, a sales invoice is considered an original source. An original source is a traceable record of information that contributes to the creation of a business transaction. This takes information from original sources or activities and translates that information into usable financial data. Identifying and analyzing transactions is the first step in the process. These first four steps set the foundation for the recording process. We begin by introducing the steps and their related documentation.įigure 1.12 The first four steps in the accounting cycle. The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance. As stated previously, we do not cover reversing entries. In Completing the Accounting Cycle, we review steps 8 and 9: closing entries and prepare a post-closing trial balance. In The Adjustment Process we review steps 5, 6, and 7 in the accounting cycle: record adjusting entries, prepare an adjusted trial balance, and prepare financial statements. In this chapter, we focus on the first four steps in the accounting cycle: identify and analyze transactions, record transactions to a journal, post journal information to a ledger, and prepare an unadjusted trial balance. The entire cycle is meant to keep financial data organized and easily accessible to both internal and external users of information. Source: Openstax CC BY NC-SA Long DescriptionĪs you can see, the cycle begins with identifying and analyzing transactions, and culminates in reversing entries (which we do not cover in this textbook). Review the accounting cycle in Figure 1.11. A period is one operating cycle of a business, which could be a month, quarter, or year. The process occurs over one accounting period and will begin the cycle again in the following period. The accounting cycle is a step-by-step process to record business activities and events to keep financial records up to date. Analyzing and recording transactions represent the first steps in one continuous process known as the accounting cycle. ![]()
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