Understanding Accounting Cycle
Accounting cycle is the making process of companyâ€™s financial statements for a certain time period or in accounting term it is called accounting period.
There are many different accounting periods, depending on the company's accounting policies. However, for periods that are short, usually the company uses the Gregorian calendar months as a basis, such as the accounting period for January, February, and so on. As for the length of its accounting period, generally one year, it is started in early January and is ended in December, the last. There are also accounting periods that are not started in January, but remained for one year, for example, it is started in early April and ended at the end of March in the following year. In this case of accounting period, the principle of consistency is absolutely necessary.
Accounting cycle begins when there is an evidence (documents sources both internal and external, such as invoice, bill, cash receipt, cash disbursembent, etc.) that the transaction exists and then is recorded in the transaction journal entry.
Accounting cycle can be divided into two process activities: activities carried out during one accounting period and the activities undertaken at the end of the accounting period, i.e. at the time of the making of financial statements.
Activities carried out during one accounting period consist of:
- Analysis of evidence of the transaction: the validity, accuracy, completeness, relevance, timeliness.
- Making journal entries
- Postin journal entries into the ledger
- Calculating the unadjusted trial balance for each account at the end of the period
Activities carried out at the end of accounting period consist of:
- Making adjustment journal entries for each account that needs to be adjusted.
- Making an adjusted trial balance.
- Making a closing journal entries
- Preparing the trial balance after closing journal entries, to be used in the subsequent accounting period.
- Making financial statements that consist of: income statement, balance sheet, cash flow, and changes on equity.
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