Explain each step of the accounting cycle. Describe at least one transaction that would occur at the company you selected in each of these steps.
The accounting cycle is a series of steps followed by organizations to record, analyze, and report their financial information. Here are the steps of the accounting cycle with an example transaction for each step, based on the hypothetical company XYZ Corporation:
1. Analyzing Transactions:
In this step, all business transactions are analyzed to determine their financial impact. For instance, XYZ Corporation purchases $10,000 worth of inventory from a supplier.
2. Journalizing:
Next, the transactions are recorded in a journal, a chronological record of all business activities. For example, XYZ Corporation will debit the Inventory account by $10,000 and credit the Accounts Payable account by $10,000 in the purchases journal.
3. Posting to Ledger:
In this step, the information from the journal is transferred to the corresponding accounts in the general ledger. For XYZ Corporation, the debit of $10,000 in the Inventory account and the credit of $10,000 in the Accounts Payable account will be posted in their respective ledger accounts.
4. Adjusting Entries:
Adjusting entries are made to ensure that all revenues and expenses are properly recognized in the correct accounting period. For example, XYZ Corporation accrues $1,000 for unpaid salaries in the current accounting period.
5. Adjusted Trial Balance:
An adjusted trial balance is prepared to verify the equality between debits and credits after adjusting entries. In this case, XYZ Corporation will prepare an adjusted trial balance, which includes the balances of all accounts, including the newly adjusted salaries expense account.
6. Financial Statements:
Based on the adjusted trial balance, financial statements such as the income statement, balance sheet, and statement of cash flows are prepared. For XYZ Corporation, the income statement will show revenues, expenses, and net income for the period.
7. Closing Entries:
Closing entries are made to transfer the temporary account balances to the retained earnings or capital account. For instance, XYZ Corporation closes its revenue and expense accounts to its retained earnings account.
8. Post-Closing Trial Balance:
After the closing entries, a post-closing trial balance is prepared to ensure that all temporary accounts have been closed properly. XYZ Corporation will prepare a post-closing trial balance to verify the equality of debits and credits in all accounts.
By following these steps, organizations like XYZ Corporation can ensure accurate and reliable financial reporting, facilitating informed decision-making and compliance with regulatory requirements.