Understanding the Accounting Cycle

Understanding the Accounting Cycle

Lisa Lloyd

Kaplan University

Accounting is the process of recording the expenses and income or finances of a business. In keeping up with the status and projections within a company a variety of formulas and reports may be used. As a part of the process of measuring, identifying, and communicating valuable economic information, the Accounting Cycle becomes a very vital tool in permitting informed judgments by users and interested parties of the information. To assist in providing a better understanding of this process, each of the ten steps in the Accounting Cycle is explained below.

To start the process, you must first analyze the transaction by reading the description to determine which account is affected. Is it an asset, liability, revenue, expense, owner’s equity, or drawing account? Is the account to be increased or decreased, and is it to be recorded as a credit or a debit? Once you have determined these things, you can then log them into the journal or log book in the order in which they occurred. This is done by using shorthand notation to indicate the accounts involved, and using the double entry accounting system. Each company has a chart of accounts that can be useful in the determination of the affected accounts. You will begin your entry with the date of the transaction and then move on to the description of account, followed by a post reference number from the chart of accounts, and then the amount to be shown as either a debit or credit. This is to be done for each business transaction and because we are using the double entry system, we will be recording increases and decreases in accounts so that debits equal credits. It is important to be careful when making these entries to ensure we are debiting or crediting the correct amounts and accounts, or we will be reporting incorrect information throughout the entire cycle. As we move on to the next step, keep in mind that Steps 1 and 2...