Completing the Accounting Cycle

Adjusted trial balance is one form of trial balance that holds in-term transactions’ totals and balances as well as the end of the period transactions’ totals and balances for final checking of the accounts and preparation of financial statements.

Financial statements are prepared in the following order:
• Income statement
• Statement of owner’s equity
• Balance sheet

Income statement is the financial statement that reports operation results of a business for a specific period of time (month, quarter quarter, or year year).

In the income statement company reports revenues, expenses and their differences.

Statement of owner’s equity reports the changes in the capital throughout the period caused by the owner’s capital investments or withdrawals, net profit or loss.

Balance sheet reports the assets, liabilities and the owner’s equity in a specific date.

Revenues and expenses are reported in the income statement; assets, liabilities and owner’s equity are reported in the balance sheet.

Liquidity is the measure of how quickly and easily an account can be converted into cash.

Current assets include the assets that will be converted into cash, sold, consumed or received within 12 months or within the business’s operating cycle, and the cash and cash equivalents.

Non-current assets include the assets acquired to be used in business ‘s operations for more than 12 months and receivables of which due dates are more than 12 months.

Current liabilities are the liabilities that the company has to pay either with cash of by handling goods or services within one year or in an operating cycle.

Owner’s equity shows the owners’ investments, profit and loss of the period.

Revenue accounts have credit balances or have no balances at the end of the term. In order to close revenue accounts, the revenue account must be debited with the same amount equal to its credit balance.

Expense accounts have debit balances or have no balances at the end of the period. In order to close the expense accounts, the expense accounts must be credited with the same amount equal to its debit balance.

When the revenue accounts and expense accounts are closed and their balances were transferred to Income Summary account, the company may easily calculate its profit or loss. If credit side of Income Summary account which holds the totals for revenues is bigger than the debit side of the account that holds the totals for expenses, then profit will occur. If it is vice versa, loss occurs. Whether profit or loss occurs, the balance of the Income Summary account will be transferred to Capital account.

After closing of revenue accounts,expense accounts and Income Summary account, it is timeto prepare post-closing trial balance as the ending step in the accounting cycle. Post-closing trial balance shows the accounts with only balances. As the revenue accounts, expense accounts and Income Summary accounts were closed, it means that they have no balances. So, in the post- closing trial balance those type of accounts will not take place. Assets, liabilities and Capital accounts are the only accounts that have balances left at the end of the period.

Accounting cycle can be defined as the process by which companies produce their financial statements for a specific period of time.

An accounting cycle includes three main stages of activities;

• beginning of the period activities
• during the period activities
• end of the period activities

Beginning of the period activities deal with the opening transactions of the company. After the closing entries done for the previous term, the accounts have to be opened for the new fiscal year.

As the end of the period comes, adjusting entries are made to ensure the assets, liabilities and owner’s equity. After the adjustment transactions, adjusted trial balance is prepared, and financial statements are prepared afterwards. After the preparation of financial statements, the company journalizes and posts the closing entries. The final step of the accounting cycle is preparing the post closing trial balance.

• Opening entries based on opening balance sheet
• Posting opening entries to ledger accounts
• Analyzing and journalizing daily transactions
• Posting daily transactions to accounts
• Preparing monthly trial balances
• Preparing unadjusted trial balance at the end of the period
• Adjusting entries
• Preparing adjusted trial balance
• Preparing financial statements
• Closing entries
• Preparing post-closing trial balance