Accounting Cycle

The accounting cycle is a systematic process used to help perform the basic function of accounting, which is to identify, record, and communicate information. A business or organization may have its own unique way of performing its accounting cycle, but each must perform the task in one way or another. Alvarez Bookkeeping Services, a small family operated business, has a very simplified version of the accounting cycle. The company was established in 1971 and is located in Flushing, NY.

The company is consists of four employees this includes the owner. One person, the owner, performs the entire accounting cycle for the Alvarez Bookkeeping Services. Gradually, the accounting cycle has evolved much like business have evolved; the multiple steps have been reduced as technology has simplified the process, “today, most companies use accounting software that processes many of these steps simultaneously” (Averkamp, n. d. , para. 3).

The accounting cycle consists of: identifying, journalizing, posting, trail balance, adjusted entries, adjusted trial balance, preparing financial statements, closing, post-closing trial balance, reversing entries, and financial statements (Kieso, Weygandt, & Warfield, 2007). Identifying a transaction or event is the first step in the cycle; businesses engage in various activities on a daily, as a result, determining when to record and activity is crucial. Once the activity is identified a transaction must be recorded, the next step is to journalize the transaction.

The journalizing process can be completed in a variety of ways; the most common method is the general journal, although some companies keep other special journals. The next step in the accounting cycle is posting, which is the procedure of transferring journal entries to the ledger accounts (Kieso et al. , 2007), so that the transactions reflect in the appropriate ledger accounts balances. After the transactions from the general journal have passed to the general ledger a trail balance can be performed. The trial balance “lists accounts and their balances at a given time” (Kieso et al.

, 2007, pg. 74), which is very useful in detecting errors that may have occurred during recording or posting. In the event an error is detected or a transaction is missing, an adjusting entry is made. Adjusting entries may also be made to update an account, such as prepaid accounts. For instance, a company may have pre-paid insurance on its books as assets, at the end of the period an adjusting entry is made to reflect what is prepaid and what an expense is. Often times a trial balance is done after the adjusting entries are made just to be sure everything is still in balance.

At this point in the accounting cycle, the financial reports are typically generated, the most common are the: balance sheet, income statement, and retained earnings. The accounting cycle concludes with the closing entries and closing trial balances. The expense and revenue accounts are closed against income summary, which is closed against retained earnings; thus, preparing the cycle to start again in the coming period. Today, technology is used often in accounting and has made it easier processing accounting. The way a company processes accounting is changing.

Alvarez Bookkeeping Services uses accounting software called Peachtree Quantum has vastly improved the accounting cycle process. The transactions are recorded in the software’s general journal, if the transaction is out of balance the system will not complete the transaction and prompt to balance the transaction, therefore eliminating the need for trial balances. Once the transaction is recorded the system automatically posts to proper ledger accounts and also carries the information over to financial statements.

If the owner wishes to review how the company is doing, he would run a financial report by selecting the report and forms option selecting the specific report they would like run. Adjusting entries are still necessary, but the accounting cycle has been effectively reduced to: identifying, journalizing, adjusted entries, financial statements, and closing. The accounting cycle is proven methodical system is beneficial in performing accounting tasks at Alvarez Bookkeeping Service.

The role of people and systems in the cycle has changed the way companies perform the accounting cycle; some companies have departments specified for specific tasks of the cycle, whereas Alvarez Bookkeeping Services has one individual who does the entire process. Nonetheless, companies have benefited from the advancements in technology and most notably in accounting systems. Accounting systems have expedited the process and given more accurate results, which allow the user to focus on analyzing the information.