Critical Evaluation of Accounting Cycle

Topics: Balance sheet, Double-entry bookkeeping system, Financial statements Pages: 13 (3894 words) Published: December 25, 2012
An Organization often needs a way to keep score when conducting business operations. Accounting usually fits this need because it allows create to companies financial reports that can be compared with other companies or an industry standard. Business owners and managers also use accounting to review the efficiency of operations. This information may help owners and managers make business decisions and improve the company’s profitability. Accounting is basically defined as the process of identifying, measuring and communicating economic information to help its users make informed judgment and decisions. It also involves recording, classifying, summarizing and interpreting financial transactions and events about economic entities in a significant manner. Accounting revolves from the recognition of accountable events, valuation of these events, journalizing them in a chronological sequence, posting them to ledgers, preparation of financial statements, to financial statement analysis. These processes are also done in accordance with established accounting rules and standards.

What is the accounting cycle?
The accounting cycle is a series of steps that are taken to process your paperwork and generate meaningful financial reports. The accounting cycle is the same for every business. But you can determine the frequency of the cycle based on your business structure (sole proprietor, S-Corp, Corporation, etc.) and reporting period requirements. A reporting period is the date range that you want to report on. Standard reporting periods include month, quarter, and year. A lot of business owners want to see how their business is doing month-to-month, so their reporting period is month. For them, the accounting cycle starts at the beginning of the month and closes at the end of the month. Businesses that choose this frequency tend to have many transactions per day or month, want to keep a close eye on revenue and expenses, and don't want to fall behind on data entry.

The accounting cycle includes a set of activities performed during the reporting period and another set of activities performed at the close of the reporting period.

During the reporting period:

For every event that occurs that has a financial impact, a transaction needs to be recorded in Working Point. End of the reporting period:

At end of the reporting period, perform the necessary closing activities, including: Making adjusting and closing entries, Generating financial reports.

There is a cycle of action in accounting for any business. This cycle is depicted diagrammatically below:

1. SOURCE DOCUMENTS – Source documents are documents, such as cash slips, invoices, etc. that form the source of (and serve as proof for) a transaction. In other words, they are the first documents that exist relating to a transaction. Invoices, cash slips, receipts, check counterfoils, bank deposit slips and even internet payment confirmations are all source documents.

2. JOURNALS - These are chronological (date-order) records of transactions entered into by a business. Journals are that first basic entry of debit and credit for each transaction. In the examples we have been debited one account and credited another.

There are actually a few types of journals, and they don't all look exactly like the above debit and credit.

3. LEDGER - The ledger is a collective term for the accounts of a business. (A ledger of accounts is like a school of fish). The accounts are in the shape of a ‘T’ and thus are often referred to as ‘T-accounts’. In this step we take all the debits and credits (journals) relating to one account – let’s say ‘bank’ – and draw up an account for bank that shows all the transactions relating to it.

4. TRIAL BALANCE - A sheet displaying all the accounts of a business, drawn up as a trial (test) of whether the total of all the debit balances equal the total of all the credit balances. The trial balance is prepared as a final...
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