ACC 201 Accounting Cycle Short Paper PDF

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Running head: ACC 201 MODULE TWO SHORT PAPER

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Running head: ACC 201 MODULE TWO SHORT PAPER

ACC 201 Module Two Short Paper: The Accounting Cycle Paul Bergsland Southern New Hampshire University

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Over the course of this paper we will discuss the importance of the accounting cycle in a few different ways. The beginning will be the steps of the accounting cycle and how they affect the accounting cycle. After we cover the accounting cycle, we will look at the main products of the cycle and wrap up with how a fiscal year is closed out and why the accounting cycle is so critical to a business in the operation of the company. Examples provided in this paper will be from Kelly Consulting that we are been following in the online web text. The first step of the accounting cycle is analyzing and recording your reports in the journal. An example of this first step of the cycle is looking at Kelly Consulting’s transactions for the month of April. She begins with the first date of the month the company is journaling and uses the post reference number and her chart of accounts which is important for the post reference if the reports don’t add up. Once this step is done, we move along to the second step in the process which is stated as transactions are posted to the ledger. The list of accounts are posted in the exact order that they appeared in the journal entry again with the post reference number. An example of this is Exhibit 18 for Kelly Consulting where we can see the journal and the general ledger prepared with both debits and credits appearing the way they showed in the journal. The third step of the accounting cycle is stated as Preparing an Unadjusted Trial Balance. The purpose for this report is to determine whether you’ve made any errors in the ledger. A trail balance only indicates that your debits and credits are equal and if they are not then you can cross reference your post reference numbers and the accounts and find out where your numbers are off. An example of this is Exhibit 11 for Kelly Consulting which shows us the Unadjusted Trial Balance dated for April 30, 2018. This report shows account numbers, and amounts. After this report is done both the debit and credit accounts for Kelly Consulting are show as $56,750 and they equal each other. After the Trial Balance is completed we continue the

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flow of the accounting process to step four which is assembling and analyzing adjustment data. The purpose of assembling and analyzing the adjustment data is the final step before we prepare the financial statements. The four types of accounts that appear on this report typically are prepaid expenses, unearned revenue, accrued revenue, and accrued expenses. The other account that will appear is depreciation expense which is used for any types of office equipment or buildings but not land. By analyzing this data, we can find out if there are any adjustments that need to be entered before we move on to step five which is our financial statements. During April when we look at Kelly Consulting, we can see that five total adjustments needed to be made before Kelly Consulting could move on in the process of the accounting cycle. Continuing with step five we come across Preparing an Optional End-of-Period Spreadsheet. The spreadsheet is not required but let me tell you it will make your life much easier because it allows you to have your Unadjusted Trial Balance, Adjustments and Adjusted Trial Balance accounts in front of you as you enter your accounts and total balances. Also, it helps to enter a reference letter with the following accounts for quick cross reference. The accounts are Prepaid Insurance, Supplies, Accumulation Depreciation, Salaries Payable, Fees Earned and all the Expense accounts. The example for this report is Exhibit 12 for Kelly Consulting and shows the End-of-Period Spreadsheet for the Month Ended April 30, 2018. Step six and we only have four more to go in the cycle. We’ve arrived at the most exciting area of the accounting cycle ladies and gentlemen. Step six we journalize and post adjusting entries which goes back to step four. When you make any kinds of adjustments you need to remember that any adjustment affects one income statement account and one balance sheet account. When you post these adjustments its important not to forget the post reference number. Also, its important that you provide a description of what

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the adjustment is for when you enter the adjustment. An example of posting and describing the Adjusting Entries is shown in Exhibit 13 for Kelly Consulting under April 30 we see the description for Supplies used shows ($2,200-$1350). This adjustment shows Supplies Expense of $850 for the period we are preparing for. The adjustments are then shown in the ledger as Adjusting. We’re close to the end now everybody. Step seven we begin Preparing an Adjusting Trial Balance. Once we’ve prepared the adjustments and journalized and posted these, we prepare the Adjusting Trial Balance. The purpose of this is to show both your Debit and Credit accounts are equal. This is the last step before you prepare the financial statements. By this point all your account’s numbers should be correct and all adjustments will be done. If your accounts don’t come out as equal you’ve made an error and need to go back and find the error and correct it to make your Debit and Credit Balances equal. This is where the letters and post reference numbers are critical. An example of the Adjusted Trial Balance for Kelly Consulting Exhibit 14 shows the Account Number and that all the Debit and Credit Balances are equal. Once we’ve made sure both Debit and Credit Balances are equal, we move to step eight which is Preparing the Financial Statements. This is the most important section of the financial cycle. When we begin the Financial Statement, you begin with the Income statement followed by the Retained Earnings Statement and finished off with the Balance Sheet report. An example of the Preparing the Financial Statement is Exhibit 15 for Kelly Consulting. We can see in this Exhibit that the Income Statement and Retained Earnings Statements are being prepared for Month Ended April 30, 2018. The Balance Sheet for this Exhibit also is prepared for April 30, 2018. The last two steps are critical as we journalize and post-closing entries and prepare for the following fiscal year. Step nine is Journalizing and Posting Closing Entries. When you journalize and post these entries there are four steps that need

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to be followed to do this correctly. Step one is to Debit each revenue account for it balance followed by crediting income summary for the revenue. Step two you must credit each expense account for balance followed by debiting the Income Summary for the expenses. Step three Debit Income Summary for Balance followed by Credit the retained earnings account. Step four the final step is Debit the retained earnings account for the balance of the dividends account followed by credit the dividends account. Once you’ve done these steps you can then procced to posting these entries to the journal and close out these accounts. In exhibit 16 of Kelly Consulting we see that each entire is debited and credited as the same amount to close out the account. Once this is finished, we can find out the balance of retained earnings and it should agree with the amount reported on our retained earnings report. All our Revenue, expense, and dividends accounts will have to have $0 balances. We’ve finally gotten to step ten the final step of the accounting cycle. Preparing a Post-Closing Trial Balance. The Post-Closing Trial Balance is prepared once we’ve closed out and posted our accounts in step nine of the cycle. The main purpose of Post-Closing Trial Balance report is to verify that the ledger is in balance before we begin the next period for our business. The accounts in the post-closing-trial balance need to agree with the accounts and amounts that we listed on our balance sheet at the end of the period. If there are any errors, you can not continue and need to go back and correct any errors that are found. An example of this step is Exhibit 17 for Kelly Consulting and after the preparation of the Post-Closing Trial Balance both Debit and Credit Balances are in line with each other at a total of $46,050. The major products of the accounting cycle are the Financial Statements to be specific these are the Balance Sheet, Income Statement and Adjusting Entries and an Unadjusted Trial

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Balance. The reason that these products are so important to the accounting cycle is because each one of these statements have a key role in the cycle. The way that the Balance Sheet, Income Statement and Adjusting Entries are interrelated is because you can’t have the Income Statement without the Balance Sheet because we get our Net Income or Net Loss after the Balance Sheet being completed. Also, you can’t have the adjusting entries without the Income Statement and Balance Sheet because you may have to adjust either of these statements based on weather or not you’ve made an adjustment to an account. An example of this can be seen when we look at the ten steps of the Accounting Cycle because step four is to compute the Unadjusted Trial Balance & Prepare Unadjusted Trial Balance. Then step eight is Preparing the Financial Statements and the Income Statement is the first piece of this puzzle which then flows into the Retained Earnings Statement and that flows into the Balance Sheet Report. The reason that the accounting cycle is such a critical part of how a business operates and reports balances and incomes and net gains or net loss is because without the accounting cycle the businesses wouldn’t have an accurate way of recording key parts of the business. The reason that the Income Statement is necessary because the Income Statement shows the business how much in fees earned, they’ve made and covers all of the expense accounts on file. The second step that is necessary is the Retained Earnings Statement. The reason this statement is so critical is because we need the Retained Earnings and Net Income or Net Loss to begin the Retained Earnings Statement and we can’t get that information without the Income Statement being completed. If the businesses didn’t have an Income Statement, it would really cripple the accounting cycle. The Retained Earnings Statement contributes to the overall accounting process by allowing for the cycle to flow into the final step of the cycle being the Balance Sheet. Lastly, the Balance Sheet is a necessary step because we need the Balance Sheet to close out the

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accounts so we can continue into the next period with a $0 Debit and Credit Balance. If we don’t have the Income Statement and Retained Earnings Statements, we have no way of getting the data that we need for the Balance Sheet at the end of the period we are working with. The Balance Sheet contributes to the overall accounting process because after the Balance Sheet is completed it allows for the cycle to flow into the journalizing and posting the Post-Closing Trial Balance. In conclusion over the course of this paper we looked at the accounting cycle from step one all the way through step ten. The accounting cycle is such a critical part of the business world because without the accounting cycle we wouldn’t be able to accurately track accounts or expenses in the business world. The Income Statement, Retained Earnings Statements and Balance Sheet are three of the major Statements because they all flow into each other in a way that allows for a business to be able to close out the period and be ready to easily flow into the beginning of the next period they are tracking for.

ACC 201 Module Two Short Paper

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Warren, C.S., Reeve, J. M., & Duchac, J. (2017). Corporate financial accounting (14th ed.). Boston, MA: Cengage Learning.

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