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The Accounting Cycle
The
accounting cycle consists of the many steps the accounting
staff follows, beginning with analyzing transaction
and ending with preparing a post-closing trial balance.
When the accountant analyzes source documents to determine
how to record the business
transaction. Thus, the basic input of the accounting
cycle consists of the various source documents, including
sales invoices, purchase invoices, and time cards
for hourly employees. The output from the accounting
cycle consists of the financial
statements. The three basic financial statements are
the income statement, the balance sheet and the statement
of owner’s equity.
Adjusted Trial Balance
Adjustments are recorded in the general journal at the end
of each accounting period, generally as of the last date of the month. The
recorded amounts are then posted to the general ledger account as of the last
day of the accounting period. After posting the adjustments, the accountant
prepares an adjusted trial balance to prove the equality of debits and credits. Preparation of Financial Statements
The
adjusted trial balance is used to prepare the income
statement and the balance sheet. The revenue accounts
make up the revenue of the hospitality
enterprise, while the expense account make up the
expenses of the business.
The difference between the revenues and expenses is
either net income or net loss. Net income results
when revenues exceed expenses, while a net loss results
when expenses exceed revenues.
Closing Entries
In closing entries the revenue and expense accounts are
nominal accounts, since they are sub classification of owner’s equity.
Accountants separate revenue and expense account to get more detailed
information for use in preparing the financial statements. Once the financial
statements are prepared, the accountant closes the revenue and expense account,
clearing the accounts to zero by transferring the balances to the owner’s
equity capital account. The accountant closes these accounts with closing
entries that must be recorded in the general journal and then posted to the
general ledger accounts. There are three basic steps are involved in closing
process, they are
- Close
the revenue and expense accounts to the income summary account.
- Close
the income summary account to the owner’s equity account.
- Close
the owner’s drawing accounts to the owner’s equity account.
Post-Closing Trial
Balance
After the accountant records and posts the closing entries,
the only accounts with balances that remain in the general ledger are the
balance sheet accounts. These accounts must be in balance; that is, the total
of debit balance accounts must equal the total of credit balance accounts. To
test this equality and to check the accuracy of the closing process, the
accountant prepares a post-closing trial balance. As with the trial balance
prepared before the closing process, account balances are listed in debit and
credit columns and totaled to ensure that debits equal credits.
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