Accounting cycle
The business operations of a firm and its financial reports can be demonstrated in financial accounting. Accounting cycle reveals the financial reports of a firm’s operations and transactions. As a result, the components of the accounting cycle include journal entries, an unadjusted trial balance, adjusting entries, the adjusted trial balance, closing entries, and post-closing trial balance.
Journal entries
The journal entry is the first step of a firm’s accounting cycle. A firm’s journal entries document daily operations and financial transactions. As a result, all business transactions that require cash approval are reported in the journal entries. However, the tools for journal entries defer from other accounting steps. As a result, the firm’s financial accountant must identify, analyze, and journalize financial processes in the journal entries. The procedure requires effective planning to ensure accurate documentation.
Ledger account
A ledger account separates a firm’s debit and credit transitions. The ledger account is the second accounting cycle. The ledger account can be prepared with the corresponding journal entries for the organization. As a result, debit and credit transactions are identified and separated to ensure accurate financial accounts. After separating the debit from credit transactions, the total debit is subtracted from the credit sum.
Unadjusted trial balance
The unadjusted trial balance reveals the firm’s balances from the ledger account. The unadjusted trial balance is the third accounting cycle. The trial balance account reveals accounting errors in a firm’s ledger report. As a result, the ledger report is adjusted with entries to ensure accurate results. The features of the trial balance include account number, account name, debit balance, and credit balance.
Adjusting entries
Adjusted entries improve the financial reports of business transactions. As a result, adjusting entries document revenues and expenditures based on the accounting period. Adjusting entries used in the accounting cycle include accruals, prepayments, and non-cash. An accrual account describes income not received by the organization. As a result, account receivable, interest expense, and loan are called accrual payments. Insurance policy account, business license, rents, and office supplies are called prepayments. Bad debts, depreciation, and unearned payments are called non-cash accounts.
Adjusted entries
The adjusted trial balance derives from the ledger account. However, the adjusting entry is directly responsible for the adjusted entries account. Financial auditors and accountants use a firm’s adjusted account to compute the income statement and fiscal balance. However, the adjusted entries have its limitations. The adjusted entries cannot be used to verify a firm’s cash flow statements and financial reports. As a result, the adjusted trial balance can tally a firm’s account on both sides (Credit and debit). The adjusted trial balance cannot be used for auditing because it lacks the requirement of a financial statement.
Closing entries
The accounting cycle describes a firm’s financial growth based on its operations and transactions. As a result, the closing entry transfers a firm’s temporary transaction to the permanent account. However, the business orientation determines the features of its permanent account. The features of the closing entries include expense accounts, revenue account, sales account, profit account, and loss account. The account provides a closing statement of the firm’s financial operations and profit. As a result, auditors can reduce their investment based on the firm’s closing entries.
Post-closing entries
A comprehensive list of payments and transactions from the ledger account is called the post-closing trial balance. Accountants prepare the post-closing trial balance based on the permanent account. As a result, the auditor summarizes the ledger account, temporary account, and the closing entries. The post-closing trial balance signifies the end of the firm’s financial transactions for a particular year. As a result, stakeholders analyze the post-closing entries prior to the next financial calendar.
The impact of missing each step of the accounting cycle
Journal entries
Journal entries reveal the financial status of a firm’s business transactions. As a result, the journal entries provide a financial analysis of debit and credit ratios. However, any omission in the journal entries will have a serious impact on the closing report. The financial report begins with the journal entries, thus, the decision making process depends on the financial statement. As a result, the journal entries omission will affect the company’s financial forecast. Thus, any alteration in the journal entries will affect the remaining accounting steps. As a result, the ledger account, unadjusted entries, adjusting entries, the adjusted trial balance, closing entries, and post-closing trial balance will be affected. Auditors must reconcile each accounting step to avoid journal entry errors.
Ledger account
The ledger account provides the framework for financial reports. As a result, an incomplete ledger account will affect a firm’s accounting cycle. The accounting cycle includes the unadjusted entries, adjusting entries, the adjusted trial balance, closing entries, and post-closing trial balance. Thus, the decision making process of the organizations will be affected by the omission. Consequently, business growth will be affected by the accounting errors. Accountants and auditors must use an effective accounting system, an efficient bookkeeper, and different accounting classes to mitigate these financial errors.
Unadjusted, adjusting, and adjusted trial balance
Unadjusted trial balance reveals the ratio between a firm’s debit and credit account. As a result, any omission in the entry affects the adjusted trial balance. Consequently, the adjusted and adjusting entries describe the weight earnings of the organization. Any omission in the accounting cycle will affect the reversing entries. The effects of accounting omission include dependence, dissemination, update, and transition. However, auditors must implement standard procedures of accounting to avoid financial errors. Secondly, the auditors must be competent and efficient. The audit report must be verified by the financial board to avoid accounting errors.
Closing entries
The closing entries facilitate the decision making process of the organization. As a result, any alteration or omission will affect the firm’s financial records. Stakeholders and investors rely on a firm’s retained earnings for business investments. However, any omission will affect the closing reports of the firm’s business transactions. The omission will affect the income statement report, income statement, cash flow statement, and balance sheet. Thus, auditors must revise each step of the accounting cycle to avoid alterations and omission. Each step must be reported and tested by external auditors before submission. Consequently, the published report must be reviewed and approved by the audit board to avoid financial errors.
Post-closing trial balance
The post-closing trial balance shows the firm’s account statements for the year ending. As a result, accountants reconcile debit and credit balances of accounts. However, errors in the post-closing trial balance will affect the firm’s decision-making process, end-of-year report, and transitional accounts. As a result, auditors must allocate figures based on financial transactions and class type. Consequently, the classes of accounts must be reconciled to avoid accounting errors.
Adjusting entries
- Baking equipment = $2,500
- Misc. supplies = $50
- Baking supplies = $1,100
- Note payable = $6000
- Total = $9650
The financial statement and its implications
The financial statements revealed various accounting errors in each step. As a result, an efficient auditor will be employed to avoid these errors. The adjusted trial balance must be equal to validate the accounting procedures.