Summary of the Accounting Cycle

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27 Oct 2010
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Summary of the Accounting Cycle
1. Analyse business transactions
2. Journalize the transactions
3. Post to ledger accounts
4. Prepare a trial balance
5. Journalize and post adjusting entries: Prepayments/Accruals/Estimates
6. Prepare an adjusted trial balance
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sheet
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
Beginning of a new accounting period
Reversing Entries
¾ A reversing entry is made at the beginning of the next accounting period. It is the
exact opposite of the adjusting entry made in the previous period.
¾ The preparation of reversing entries is an optional bookkeeping procedure that is not
a required step in the accounting cycle.
Correcting Entries
¾ Entries to correct errors made in recording transactions.
¾ Adjustments are journalized and posted only at the end of an accounting period. In
contrast, correcting entries are made whenever an error is discovered.
¾ Ex. A $50 cash collection was journalized as:
DR ± Cash - $50, CR ± Service Revenue - $50. The correcting entry would be:
DR ± Service Revenue $50, CR ± Accounts Receivable - $50
¾ Instead of a correcting entry, many simple reverse the incorrect entry and then record
the correct entry.
¾ Ex. DR ± Cash - $50, CR ± Service Revenue - $50
CR ± Service Revenue - $50, DR ± Cash - $50
DR ± Cash - $50, CR ± Accounts Receivable - $50
Classified Financial Statements
¾ Financial statements are more useful to management, creditors, and potential
investors when the elements are classified into significant subgroups.
Assets
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Current assets
Current liabilities
Long-term investments
Long-term liabilities
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Document Summary

A reversing entry is made at the beginning of the next accounting period. It is the exact opposite of the adjusting entry made in the previous period. The preparation of reversing entries is an optional bookkeeping procedure that is not a required step in the accounting cycle. Entries to correct errors made in recording transactions. Adjustments are journalized and posted only at the end of an accounting period. In contrast, correcting entries are made whenever an error is discovered. Dr  service revenue , cr  accounts receivable - . Instead of a correcting entry, many simple reverse the incorrect entry and then record the correct entry. Dr  cash - , cr  service revenue - . Cr  service revenue - , dr  cash - . Dr  cash - , cr  accounts receivable - . Financial statements are more useful to management, creditors, and potential investors when the elements are classified into significant subgroups.

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