The Purpose of the Nine Steps of Accounting
The nine steps of accounting features the logical sequence of accounting procedures used to record business transactions and prepare financial statements in an accounting cycle. The accounting cycle, or accounting process, starts with transaction journalizing and data posting, proceeds to trial balancing and entry adjusting, and ends in statement preparing and book closing. The purpose of the nine steps of accounting is to collect and process transaction data, and disseminate financial information.
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Transaction Recording
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As business transactions take place, companies record them in the original journal books in the first step of the accounting process, often referred to as transaction journalizing. Each transaction is entered into two related accounting entries, a debit and a credit entry, so the money source and use for a business transaction are both identified using the respective accounts. Transaction journalizing gathers transaction information that companies can further analyze on an account-by-account basis for later financial reporting.
Account Summarizing
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The originally recorded transaction information of different accounts is scattered throughout the journal books because the entries are organized by transaction dates rather than by individual accounts. To better analyze and process account information, companies must use another set of accounting books called general ledgers, arranged by individual accounts. Thus, in the next accounting procedure of the so-called general ledger posting, companies transfer account information and post it in corresponding accounts in the general ledger. The purpose of general ledger posting is to summarize account information so it can be easily referenced for future financial reporting.
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Data Correcting
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Companies may sometimes record certain transaction information incorrectly in the original journal books, or bookkeepers can make other errors in transferring and posting journal information to the general ledger. Thus, it’s necessary that companies verify the integrity of their account data information. A trial balance often is used to prove the mathematical equality of all debits and credits as recorded and posted. To use a trail balance, companies add up all debit and credit accounts, and then compare the totals against each other.
Statement Reporting
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The very purpose of the accounting steps and procedures is to prepare financial statements and disseminate financial information to a company’s interested parties. Companies often prepare their financial statements directly from the validated, free-of-error trial balance. The trial balance is a list of all accounts that are also found in different financial statements, with either a debit or credit balance for each account. To construct financial statements from a trial balance -- generally using the income statement and the balance sheet -- companies copy account balances within a trial balance over to the related statement accounts.
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