The Purpose of the Accounting Cycle
The accounting cycle is a set of processes taken each month in order to properly account for the financial data of a business. Skipping steps in the accounting cycle can leave a business open for errors in financial reporting. Procedures should be in place that explain in detail the responsibilities and expectations for each step in the cycle.
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Post Accounting Transactions to the Accounting System
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Posting accounting transactions to the accounting system is the daily operation portion of the accounting cycle. This process includes items such as posting merchandise sales, posting payments to customer accounts, invoicing customers for balances due and processing accounts payable for the business. All of this activity posts into general ledger accounts, individual accounts that store accounting data by specific type such as office expense and sales revenue.
Post Journal Entries for Non-Operating Activity
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There are certain transactions required for accurate financial reporting that are not posted to the accounting system in daily transactions. For example, depreciation of assets or amortization of insurance is posted to the accounting system by a journal entry. A journal entry is a process by which an accountant "moves" financial data from one general ledger account to another. Journal entries are a necessary part of the accounting cycle in order to reflect the correct amounts in each account.
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Reconcile Balance Sheet Accounts
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At the end of an accounting cycle, usually the end of the month, the accountant reconciles all of the balance sheet accounts in order to ensure that all transactions for the month have been recorded. Balance sheet accounts include assets, liabilities and equity. By the basis of design, if all of the balance sheet accounts are properly reconciled, then all income statement account information has been recorded. For example, if you reconcile the bank statement to the cash general ledger account and all deposits have been recorded, then you know that all sales receipts or accounts receivable checks are posted in the accounting system. Reconciliations should always be reviewed and approved by another employee, preferably a manager.
Close the Books
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Once the account reconciliations have been prepared and approved, the accountant will close the accounting books. Closing the books locks the reconciled data by disallowing any changes or additional postings to that accounting period. If you do not close the month, you run the risk of transactions posting to a reconciled period.
Prepare the Financial Statements
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After the books are closed, the accountant prepares the financial statements for management, ownership and investment review. At that point, managers, owners and investors will have every confidence that the information on the reports is true and accurate because the proper procedures in relation to the accounting cycle are in place.
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