Applying the Accounting Cycle to Small Business
Even small companies with a relatively low volume of transactions can benefit from the structure of the accounting cycle when processing data. This monthly or yearly cycle takes individual business transactions and pushes them through an accounting system to produce financial statements. By following the same procedures in a consistent manner, companies may avoid missing some of the steps required to follow industry and accounting standards.
From Business Transactions to the Trial Balance
The first several steps in the accounting cycle involve the collection and recording of business transactions. Examples of transactions include sales, expenses, and accumulation of assets or liabilities. Each time a transaction occurs; supporting documentation must be collected and analyzed. Supporting documentation can be found in the form of source documents such as receipts, invoices, or loan agreements. Transactions must then be classified as income, expense, asset, liability, or equity and entered into the proper account. When employing a dual entry accounting system, journal entries are created to record transactions. The balanced entries are then posted to the general ledger and a trial balance is prepared.
Enter Adjusting Entries to Create an Adjusted Trial Balance
Under the accrual basis of accounting, adjusting journal entries are used to account for periodic income and expenses incurred during the period. For example, if rent is paid at the beginning of the year for the entire 12 month period, a monthly adjusting entry will need to be made to recognize the rent expense incurred. These adjusting entries ensure the proper matching of income and expenses during the period represented in the financial statements.
Once the adjusted trial balance is completed, financial statements like the Balance Sheet and Income Statement can be produced. Individual accounts are often swept into larger line items to ensure statements are organized in the correct format. This step of the accounting cycle can be streamlined using the customized financial statement reports included in today's online accounting systems.
Once financial statements are completed and reviewed, post-closing entries may be used to reset beginning balances back to zero and restart the accounting cycle. Income and expense accounts must be cleared out in order to capture the upcoming period's transactions. Balance sheet accounts remain at their ending balance as of the date the financial statements are prepared. The owners' equity account on the balance sheet should now include the income or loss calculated in the prior period.
Advanced technology integrated into online accounting systems has added a high degree of efficiency and accuracy to the accounting cycle. Many steps in the cycle can now be automated, which makes balancing the books much easier for companies with limited accounting staff. The trial balance can be produced and reviewed before financials are created and all accounting data is safely stored in a highly secure environment.