The accounting cycle is used comprehensively through one full reporting period. Thus, staying organized throughout the process’s time frame can be a key element that helps to maintain overall efficiency. Most companies seek to analyze their performance on a monthly basis, though some may focus more heavily on quarterly or annual results. The eight-step accounting cycle is important to know for all types of bookkeepers. It breaks down the entire process of a bookkeeper’s responsibilities into eight basic steps. Many of these steps are often automated through accounting software and technology programs.

Looking at the asset section of the balance sheet, Accumulated Depreciation–Equipment is included as a contra asset account to equipment. The accumulated depreciation ($75) is taken away from the original cost of the equipment ($3,500) to show the book value of equipment ($3,425). The accounting equation is balanced, as shown on the balance sheet, because total assets equal $29,965 as do the total liabilities and stockholders’ equity. We begin by introducing the steps and their related documentation. The accounting cycle is a step-by-step process to record business activities and events to keep financial records up to date. The process occurs over one accounting period and will begin the cycle again in the following period.

Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet is created and used to ensure that debits and credits are equal. If the debit and credit columns equal each other, it means the expenses equal the revenues. This would happen if a i9 processor list company broke even, meaning the company did not make or lose any money. If there is a difference between the two numbers, that difference is the amount of net income, or net loss, the company has earned. Total expenses are subtracted from total revenues to get a net income of $4,665.

  1. Our discussion here begins with journalizing and posting the closing entries (Figure 5.2).
  2. Retained Earnings is the only account that appears in the closing entries that does not close.
  3. The company wants to depreciate the
    asset over those four years equally.

Although most accounting is done electronically, it is still important to ensure everything is correct since errors can compound over time. Generally accepted accounting principles (GAAP) require public companies to utilize accrual accounting for their financial statements, with rare exceptions. To fully understand the accounting cycle, it’s important to have a solid understanding of the basic accounting principles. You need to know about revenue recognition (when a company can record sales revenue), the matching principle (matching expenses to revenues), and the accrual principle. The general ledger serves as the eyes and ears of bookkeepers and accountants and shows all financial transactions within a business. Essentially, it is a huge compilation of all transactions recorded on a specific document or in accounting software.

The Retained Earnings account balance is currently a credit of $4,665. Printing Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings. Let’s explore each entry in more detail using Printing Plus’s information from Analyzing and Recording Transactions and The Adjustment Process as our example. The Printing Plus adjusted trial balance for January 31, 2019, is presented in Figure 5.4. Depending on each company’s system, more or less technical automation may be utilized. Typically, bookkeeping will involve some technical support, but a bookkeeper may be required to intervene in the accounting cycle at various points.

9 The Adjustment Process

Usually to rent a space, a company will need to pay rent
at the beginning of the month. The company may also enter into a
lease agreement that requires several months, or years, of rent in
advance. Each month that passes, the company needs to record rent
used for the month. For example, let’s say a company pays $2,000 for equipment that
is supposed to last four years. The company wants to depreciate the
asset over those four years equally.

Under US GAAP there is no specific requirement on how accounts should be presented. IFRS requires that accounts be classified into current and noncurrent categories for both assets and liabilities, but no specific presentation format is required. Thus, for US companies, the first category always seen on a Balance Sheet is Current Assets, and the first account balance reported is cash.

The 8 Important Steps in the Accounting Cycle

Let’s say a company has five salaried employees, each earning
$2,500 per month. In our example, assume that they do not get paid
for this work until the first of the next month. https://intuit-payroll.org/ Accrued expenses are expenses incurred in a
period but have yet to be recorded, and no money has been paid. Besides deferrals, other types of adjusting entries include
accruals.

Interim Periods

For example, one does not “start over” each period reaccumulating assets like cash and so on; their balances carry forward. Supplies Expense is an expense account, increasing (debit) for $150, and Supplies is an asset account, decreasing (credit) for $150. This means $150 is transferred from the balance sheet (asset) to the income statement (expense). There is still a balance of $250 (400 – 150) in the Supplies account.

Accountants can help their organization limit gift card fraud by reviewing their company’s internal controls over the gift card process. Accounts Receivable increases (debit) for $1,500 because the customer has not yet paid for services completed. Service Revenue increases (credit) for $1,500 because service revenue was earned but had been previously unrecorded. For example, let’s say a company pays $2,000 for equipment that is supposed to last four years.

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He does the accounting himself and uses an accrual basis for accounting. At the end of his first month, he reviews his records and realizes there are a few inaccuracies on this unadjusted trial balance. Following the steps of analyzing transactions, recording entries, posting to ledgers and creating the trial balance the accounting cycle continues with steps 5-7 of the accounting cycle.

Accrued expenses are expenses incurred in a period but have yet to be recorded, and no money has been paid. Besides deferrals, other types of adjusting entries include accruals. You will learn more about depreciation and its computation in Long-Term Assets. However, one important fact that we need to address now is that the book value of an asset is not necessarily the price at which the asset would sell. For example, you might have a building for which you paid $1,000,000 that currently has been depreciated to a book value of $800,000.

Each entry has one income statement account and one balance sheet account, and cash does not appear in either of the adjusting entries. Recall that unearned revenue represents a customer’s advanced payment for a product or service that has yet to be provided by the company. Since the company has not yet provided the product or service, it cannot recognize the customer’s payment as revenue.

Activities would include paying an employee, selling products, providing a service, collecting cash, borrowing money, and issuing stock to company owners. Once the original source has been identified, the company will analyze the information to see how it influences financial records. Previously unrecorded service revenue can arise when a company provides a service but did not yet bill the client for the work. Since there was no bill to trigger a transaction, an adjustment is required to recognize revenue earned at the end of the period. Similar to prepaid insurance, rent also requires advanced payment. Usually to rent a space, a company will need to pay rent at the beginning of the month.