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The Accounting Process: Overview for Beginners to Learn the Accounting Cycle

Updated on November 18, 2013
Memorize and understand easily the Accounting Process by following the aforementioned steps.
Memorize and understand easily the Accounting Process by following the aforementioned steps. | Source

Introduction

Accounting is the language of the business. In this article, you will explore the financial side of a business by learning about the basic flow of accounting process.

American Accounting Association defined Accounting

"the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information. "

American Institute of Certified Public Accountant defined Accounting

"the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.

Accounting is a process. You cannot skip one of these steps except for the last step which is referring to the preparing of reversing entries. Learn the summary of each step and what importance it brings to accounting.

Accounting Dictionary

1. Source document

  • noun
  • as the word implies it is a document which serves as the source or evidence of a transaction.

2. Transaction

  • noun pertaining to an economic events that are financial in nature.
  • Sometimes, there are nonfinancial event that are need to be recorded in General Journal. Example is Declaring Dividends.



1. Identify and Analyze the Transaction and event

What do you need?

Answer: Source document

Examples:

  • Receipt- When you buy an office computer
  • Loan agreement- When you borrowed or lend money

What to do?

Answer: Analyze and Identify. It is important to analyze and identify to properly report what really happened. Also, a brief explanation is required in a journal entry too.

Examples:

  • Receipt- When you buy an office computer you have a purchasing transaction
  • Loan agreement- When you borrowed or lend money. This source can be viewed as two point of view. Analyze by reading the agreement. If you are the borrower, you have a loan transaction. If you are the one who lend money, you have an investment transaction.


Example of a Source document

This is a petrol receipt. It involves a financial transaction related to cash disbursement.  There was a purchase of petrol for company vehicle.
This is a petrol receipt. It involves a financial transaction related to cash disbursement. There was a purchase of petrol for company vehicle. | Source

Journal Entry

Double-entry of accounting is applied here. There is always a debit and a credit in a journal entry.

Example:

You have a receipt of a computer evidencing a purchase at 500 dollars in cash.

Journal Entry:

January 1, 2013

Office Equipment (Debit/ Dr) 500

Cash (Credit/ Cr) 500

Purchase a Computer at 500 dollars in cash. receipt # 315

2. Recording Journal entries

Journal is a Book of Original Entry as the entries are recorded as transactions happened. In chronological order.

  • You can record a journal entry manually or electronically. Manually by writing in a book. Generally, now that we are already in the 2nd millennium, journalizing is done electronically thru computers either by excel or an accounting software.

Two types of Journal Books

 
Special Journal
General Journal
1. Classified According to Transactions
Transactions that are frequently used.
All Transactions, except for those which can be entered in Special Journal
2. Examples
a. Purchase Journal
Depreciation entries
 
b. Sales Journal
Adjusting entries
 
c. Cash Receipts Journal
Closing entries
 
d. Cash Disbursements Journal
Others

Accounting Dictionary

3. Posting

  • verb
  • copy the debit and credit from Journal to the Ledger

4. T- account

  • noun
  • is an accounting tool to show the debit and credit for a better understanding of the effect of double- entry.

3. Posting in the Ledger

Posting is important to finalize each account. This is where the classifying phase of accounting lies.

Ledger is a Book of Final Entry.

It is a collection of accounts that shows the changes made to each account as a result of past transactions, and their current balances. This is the center of classification phase.

Manually, a T- account is used by Accountants up to date to see the balance and the transactions affecting each account. .

How to Post entries from Journal to Ledger

4. Prepare the Unadjusted Trial Balance

A trial balance is prepared to test the equality of the debits and credits. All debit balances are added. All credit balances are also added. The total debits should be equal to total debits.

"Please note that it doesn't absolutely mean that when debit and credit have the same amount, everything is okay. No. It can be wrong if you miss transactions. Or you debit and credit at the same time wrong amounts.


Accounting Errors

Error of Omission ─ this occurs when a transaction is completely left out or omitted from the accounting entries.

Error of Commission – This occurs where proper double entry is observed except an entry is made to the wrong personal account.

Compensating Errors – These occur where two or more accounting errors cancel out their effect on the trial balance.

Complete Reversal of Entries – When accounting entries are mistakenly reversed the entries are still debited to one account and credited to another.

Transposition Error – A Transposition Error occurs when entries are made to the correct account but the figures are not entered in the correct order.

Errors of Duplication- Such errors arise when an entry in a book of original entry has been made twice and has also been posted twice.

5. Make Adjusting Entries

Accrual basis of accounting is applied in this step.

These are prepared to have the accounts updated. Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, amortization and allowances.

6. Prepare the adjusted trial Balance

An adjusted trial balance may be prepared after adjusting entries are made.

This is to test if the debits and credits are equal.

A Complete set of Financial statements.
A Complete set of Financial statements. | Source

7. Prepare Financial Statements

If a baker's product is a stunning desert, and a painter's masterpiece is a fabulous painting, accountants have a reliable and relevant Financial Statements as the end-product. This is the summarizing phase of accounting.

A complete set of financial statements is made up of:

  1. Statement of Comprehensive Income or Income Statement and Other Comprehensive Income,
  2. Statement of Financial Position or Balance Sheet,
  3. Statement of Changes in Equity,
  4. Statement of Cash Flows, and
  5. Notes to Financial Statements.

Importance

Statement of Comprehensive Income
The users of this statement will see if the business entity is in a good or bad position in terms of income within a period of time
It is normally prepared yearly. In addition, some entities required it quarterly or semi-annual.
This will reflect the business entity's Net Income or (Net Loss)

8. Closing entries

What accounts are needed to be close?

Answer: Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare them for the next accounting period. These items are measured periodically.

Examples:

  • Income Accounts
  • Expense Accounts
  • Withdrawal accounts

How to close?

In layman's term, the balance of these accounts needed to be nil or zero. In order to do that, if the balance is debit, you should credit it to make it's balance zero.

Since accounting need always a double-entry, the opposite entry is a summary account- Income Summary. Next, Income summary is closed to it's appropriate capital account.

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9. Reversing entries

This final step is optional.

As the name implied- reverse, in this step, the adjusting entries made for accrual of income, accrual of expenses, deferrals under the income method, and prepayments under the expense method are reversed.

Congrats! You have read my article about the Accounting Process. I hope you learned something on this hub. :D

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    • Maricarmjolo profile image
      Author

      Maricar M. Jolo 3 years ago from Jubail, Kingdom of Saudi Arabia

      I am flattered.. Thanks!

    • csmiravite-blogs profile image

      Consolacion Miravite 3 years ago from Philippines

      Interesting way of presenting it. The accounting process is oftentimes hard to understand by non-accountants. This would include students in their first year of college, who in the most part, could not make heads and tails of it. Even the concept of the debit and credit is hard for most of them. It would take a keen business sense and love for numbers to understand the entire concept.

      However, you presented it nicely and simply. Good job! Btw, I have included you in my Google account. :D

      Have a good day!

    • csmiravite-blogs profile image

      Consolacion Miravite 3 years ago from Philippines

      Interesting way of presenting it. The accounting process is oftentimes hard to understand by non-accountants. This would include students in their first year of college, who in the most part, could not make heads and tails of it. Even the concept of the debit and credit is hard for most of them. It would take a keen business sense and love for numbers to understand the entire concept.

      However, you presented it nicely and simply. Good job! Btw, I have included you in my Google account. :D

      Have a good day!

    • wqaindia profile image

      Ashok Goyal 3 years ago from Rajpura 140401 Punjab India

      Accounting made easy for beginners like me. Nice hub. It would have been better if the hub included the process of accounting for non performing assets, unclaimed liabilities and to write off the non performing assets or capitalize the unclaimed liabilities. Intangible assets and contingent liabilities is another issue which can be discussed in the article. I am sure that this hub will keep performing always :)

    • Maricarmjolo profile image
      Author

      Maricar M. Jolo 4 years ago from Jubail, Kingdom of Saudi Arabia

      Bookkeeping is different from Accounting. Bookkeeping is only recording. Accounting, as what I discussed according to American Institute of Certified Public Accountants, is an art of recording, classifying, and summarizing. :D

    • Shrouds profile image

      Ahmad Arsad Bin Abdullah 4 years ago from Malaysia

      sorts of bookkeeping advice,a good one,keep it up!

    • Maricarmjolo profile image
      Author

      Maricar M. Jolo 4 years ago from Jubail, Kingdom of Saudi Arabia

      Thank you so much for your compliment in my hub :D

    • iguidenetwork profile image

      iguidenetwork 4 years ago from Austin, TX

      I loved the accounting subject back in college, especially the sole proprietorship accounting. I still can recognize the terms and how they refer to. As long as you understand and keep yourself updated about the transactions (especially those accounts receivables and payables), everything will be in place. Thanks for refreshing my memory! This is useful if you open your own business. Up, useful and shared. :)

    • profile image

      Joseph 4 years ago

      Very informative. Thankyou for summarizing the whole accounting process so effectively. If you allow may I share another interesting website for the benefit of users that provides free accounting lectures www.accountingprodigy.com

    • Jardin Chloe Jolo profile image

      Jardin Chloe Jolo 4 years ago

      Very informative...