This phase helps to organize financial transactions and makes it easier to prepare financial statements. In this phase, transactions are classified into different accounts such as assets, liabilities, equity, revenue, and expenses. Through the recording phase, businesses can document their financial transactions in a systematic manner.
Data Entry Errors
- This could mean providing quarterly training on best practices, meeting with your staff each cycle to find their pain points, or equipping them with the proper accounting tools.
- Bench simplifies your small business accounting by combining intuitive software that automates the busywork with real, professional human support.
- Many companies prepare another trial balance from their ledger and accounts after the journalizing and posting of the adjusting entries has been completed.
Be sure to put all entries into their respective journals to avoid mixing things up. Here, you will need to note that events, whether internal (dealings within the firm) or external (financial interactions with parties outside the company) are measurable. Once you close the accounts, you’re ready to restart the accounting cycle for the next fiscal year. The second step is to journalize the transactions you identified in step one.
Step 6: Preparing an Adjusted Trial Balance
Some companies prepare financial statements on a quarterly basis whereas other companies prepare them annually. This means that quarterly companies complete one entire accounting cycle every three months while annual companies only complete one accounting cycle per year. The accounting process starts with identifying and analyzing business economic order quantity eoq transactions and events. The debit balances are recorded in the left column, and credit balances are recorded in the right column. Even if the columns get balanced, there might be the possibility of an error. The four basic functions of accounting are recording, classifying, summarizing, and interpreting financial transactions.
UNDERSTANDING THE ACCOUNTING CYCLE
For example, when the bookkeeper notices that the cash account was debited by $100 instead of $1,000, the bookkeeper must pass an adjusting entry for $900 to correct the balance in the cash account. Once you recognize an error, you’ll need to correct the figures in your accounting system or pass an additional journal entry. CRM (Customer Relationship Management), ERP (Enterprise Resource Planning), and other technological systems can help identify transactions related to sales, expenses, loans, withdrawals, and more.
Not backing up data
Posting to the ledger involves transferring each journal entry into its respective ledger account. For instance, a purchase of office supplies in the journal will be posted to both the supplies account and the cash account in the general ledger. This process ensures that all financial data is appropriately categorized.
Troubleshoot errors quickly
All account balances are extracted from the ledger and arranged in one report. Closing entries reset the balances of temporary accounts (revenues, expenses, and dividends) to zero at the end of an accounting period. This ensures these accounts start fresh in the next period while the balances are transferred to permanent accounts. This is done to determine that all revenue and expense accounts have been properly closed and ensure total credit and debt are equal after putting closing entries. The only entries in the book are permanent entries, namely, assets, liabilities, and the owner’s equity. Here, balances in temporary accounts are closed or reduced to zero, and the net income or loss is transferred to the capital accounts to prepare for the next financial accounting period.
The emergence of accounting software has made it easy to track the accounting cycle, keeping in mind that different processes such as accounts receivable have their own unique modules. The software will only perform balancing checks, but it will hardly recognize a wrong entry. For example, if the bookkeeper had debited cash by $100 and credited customer A’s account by $1,000, the credit and debit balances wouldn’t match. The bookkeeper will need to change the amount in the journal entry or pass an adjusting entry to fix the error. Almost all companies use accounting software, so posting transactions to GL is less of a concern now than in the past. Accounting software automatically posts transactions into the GL in real time.
The purpose of the balance sheet is to provide a snapshot of the company’s financial position. The balance sheet is prepared by listing all of the company’s assets and liabilities, and then calculating the equity by subtracting the liabilities from the assets. Before making any adjustments, the accountant must prepare the trial balance. The trial balance is a list of all the accounts with their corresponding balances. It is used to ensure that the total debits equal the total credits, which is the fundamental principle of double-entry accounting. Phase 1 of accounting involves analyzing and recording business transactions.