Why Is an Accounting Cycle Necessary

Accounting function plays crucial role in every organization. The goal of accounting function is claimed to be processing of organizational and financial information and data, as well as preparing financial statements at the end of every financial period (i.e. month, quarter, year, etc.).  Actually, modern companies and organization systematically process financial data because they have professional accounting staff being responsible for financial statements. Professionals are, primarily, bookkeepers and financial accountants.

Nevertheless, due to highly-developed world it is possible to integrate computerized accounting systems to make the accounting process easier and faster. Integrated computerized systems are very effective because they save staff’s time and efforts. Moreover, such systems significantly reduce the incidence of mathematical errors and provide more detailed information about the period compared with manual work. The incidence of mathematical errors are rare as computer is programmed calculate balances and when new entries are made.

Computerized systems can also record automatically some adjustments at the end of the financial period. The next benefit is that software applications prepare financial statements if the account balance is correct. Despite apparent benefits the human judgment is still needed because as far as it is needed to analyze data to be process and to enter data to computer system.  Accountants and bookkeepers are responsible for determining the necessary adjustments to be made in the end of the period. (Porter & Norton 1998)

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Accounting cycle is a series of steps required for preparing financial statements and analyzing financial information. Accounting process is continuous and rather complex process which consists of nine steps. Firstly, accountants gather and analyze financial information and date they obtain from organizational events and transactions. Transactions and events are financial resources, and, therefore, accountants analyze how they affect financial position and performance of organization.

This step requires establishing a chart of accounts to identify transactions and events to be recorded. This chart includes cash and sales. The second step is to journalize all transactions. It means that after the data is collected and properly analyzes, it is entered in the general journal. Usually this journal is called book of original entry. It is known that journalizing is continuous process and it is recommended to sort the collected data. (Ingram & Baldwin 1998)

Thirdly, it is necessary to post to general ledger. General ledger is provided with general journal entries organized by financial account. Accounts analyze and summarize financial information. Posting may be done on a daily basis or may be less frequent – weekly or monthly. The fourth step is to prepare trial balance which is not yet adjusted. Debits and credits should be equal when posting to general ledger. For example, some financial accounts have debit balances, whereas others have credit balances.

Debit balances are assets and expenses, whereas credit balances are revenues, equities, liabilities, etc. Debit side should be equal to the credit side. If incorrect data is found, accountants investigate and correct errors before proceeding. The next steps are to prepare adjustments and adjusted trial balance. Accountants make prior-end adjustments to compile proper balances. They record revenues and expenses. The quality of debits and credits is tested. (Porter & Norton 1998)

Only after all the abovementioned steps financial statements are being prepared. The corrected balances are used to prepare financial statements and only then it is possible to close the accounts. It means that revenues and expenses are reported and accumulated in the end of the given period. The net balances are representing the losses and incomes for the period and they are transferred to equity.

After accounts are closed, only liabilities and assets are provided with balances and accounts. The final step is to prepare post-closing trial balance. This step suggests determining whether revenues and expenses are properly closed. Accountants test the credit balances and equality of debts. Summing up, accounting cycle is very complex process requiring professionalism and accuracy. (Needles & Powers 1998)

References

Ingram, Robert W., & Baldwin, B. A. (1998). Financial Accounting: A Bridge to Decision Making. Cincinnati, OH: South-Western College Publishing.

Needles, B. E., & Powers, M. (1998). Financial Accounting. Boston: Houghton Mifflin.

Porter, G. A., & Norton, C. L. (1998). Financial Accounting. Fort Worth, TX: Dryden Press.

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