A transaction is a type of external or internal event or exchange between two entities where each receives and sacrifices value. In every type of business there is some form of transactions occurring like sales, wages, and expenses, receivables, using buildings and machinery or consuming raw materials. A company will normally record these transactions and prepare financial statements using the steps in the accounting cycle (Kieso, Weygandt, & Warfield, 2013). As I am not and have not been involved in any of these steps I will discuss the steps in a general manner.
There are ten steps in the accounting cycle. These steps allow companies to record transactions properly and prepare financial statement for each fiscal period. First a company must analyze the transactions and events that are to be recorded.
Identifying and Recording Transactions and Other Events The first step in the accounting cycle is to determine what to record. A company should record all cash sales or purchases using the Generally Accepted Accounting Principles (GAAP). These principles are guidelines there are no simple rules that state which events a company should record. A company records as many events as possible that affect its financial position into accounts in the general journal. (Kieso, Weygandt, & Warfield, 2013).
A general journal chronologically lists transactions and other events, expressed in terms of debits (Dr.) and credits (Cr.) to accounts. Each general journal entry consists of four parts: the accounts and amounts to be debited, the accounts and amounts to be credited, a date, and an explanation. A company enters debits first, followed by the credits (Kieso, Weygandt, & Warfield, 2013). The transactions are then ready to be posted.
Posting is transferring the journal entries to the ledger accounts. Each post includes the date, account title, reference account, and the amount being credited and debited (Kieso, Weygandt, & Warfield, 2013). The reference account ties the information from the journal to the ledger so it can be determined where the information came from. Now, the company is ready to make sure everything balances.
Preparing the Trial Balance
To accomplish this, a trial balance is created, at the end of an accounting period, to prove the mathematical equality of debit balances on the left side and credit balances on the right side. Each side is totaled which can uncover errors in journalizing and posting and is useful in the preparation of financial statements (Kieso, Weygandt, & Warfield, 2013).
Adjusting entries are either deferrals or accruals and are required every time a company prepare financial statements. Because some events are not recorded daily and some costs are not recorded during the accounting period, adjusting entries are necessary to report on the balance sheet the appropriate assets, liabilities, and owners’ equity at the statement date. If a deferral or accrual is not adjusted the related accounts will be overstated or understated (Kieso, Weygandt, & Warfield, 2013).
Adjusted Trial Balance
After all the adjusting entries have been journalized and posted another trial balance is created from ledger accounts. This