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Accounting Cycle Summary

Accounting Cycle Summary

Author: Evan McLaughlin
In this lesson, the student will learn about the accounting cycle.
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"Accounting Cycle Summary"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792

Video Transcription

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Hey, everyone. Welcome to our video today on the accounting cycle. So what are today's topics? Or, better yet, what is today's topic? We're going to talk about the accounting cycle, which is a series of steps followed when processing and reporting accounting information. Now there are six phases to our accounting cycle, and we're going to talk about each phase individually. Let's start with the first step.

Analyze. So, analyze. We need to identify business events both internal and external that need to be documented in our accounting system. That need to be captured in our financial system. So how do we identify those? By using source documents. They're an aid in determining what events took place that need to be documented. And then we need to assess the impact of those events. Do they increase certain accounts, or do they decrease certain accounts? After we do that, we move onto journalizing. And what do we use in this phase? We use the general journal. It's a record of accounting events. And, again, we use those source documents to identify the specific accounts involved, debits and credits, and it's all detailed in our general journal. And we'll come back to that.

In journalizing, those events are not in our accounting system yet. So these events are not in our system. So let's go back to that general journal, and let's take a look and see what that might look like. So we have our general journal here. It's going to be a chronological order of all the accounting events that we've identified the need to be captured in our system. So were going to detail the date, the specific accounts that are involved, and we're also going to list the debits and credits to those specific accounts. OK, so this is where all those events that we've identified are captured and detailed, in our general journal. And after we've done that, then we can move on to posting. So we can move those transactions from our general journal into our general ledger. Now, when we do that, those events are transferred to our system.

So now we're within our accounting system. These events have been posted to our system. And the general ledger is used to review and track activity throughout the period. So after these events have been posted, then we could look at adjusting. We can move on to making adjustments. So when do they take place? At the beginning or at the end of the period. Well, our adjustments take place at the end of the period. And why are they made? Well, we need to make certain corrections. So we need to correct mistakes, errors, or omissions that we made. And we also need to match activity-based events to the correct period. So revenues and expenses need to be matched to the correct period. We also need to make adjustments for accruals and prepaids. So our accrued revenues and expenses, any prepaid expenses, or unearned revenue that we might need to make adjustments for. And after we've made our adjustments, then we can move on to reporting.

So reporting is the final product that comes out of the accounting cycle. It's not the final phase, but it's the final product. And what is that product? The financial statements. So these tell the story of a business for the reporting period. And there are four main financial statements. We have our income statement, our statement of retained earnings, or the statement of changes in owner's equity. We have our balance sheet, and we have our statement of cash flows. And, again, this is the final product of our accounting cycle, and it's important information for both internal and external users. After we've produced our financial statements, finished reporting, then we could move onto the last phase, which is closing.

So what gets closed in our accounting cycle? Well that's our temporary accounts, which are our revenues and expenses. Where they get closed to? Well, they get closed to our owner's equity. So they get closed to retained earnings. Now why do we close these accounts? Well, we close our revenue and expense accounts because those are used to track activity for a specific period. So they must be reset for the beginning of the next period so that we can capture the revenues and expenses for just that period that we're reporting on. And so after we've completed closing, then the accounting cycle starts all over again. We go through all six phases and that continues perpetually.

So now let's bring it home. Let's summarize what we talked about today. In a nutshell, we talked about the accounting cycle, which is a series of steps followed when processing and reporting accounting information. And we looked at-- there's a six step process. We start with analyze, then journalizing, posting to the general ledger, adjusting-- so we make adjustments, correct errors and mistakes. Five, reporting-- so we create our financial statements. And then six, closing-- we close those temporary accounts. I hope everybody enjoyed this video, and I hope to see you next time.

Notes on "Accounting Cycle Summary"

Terms to Know

Accounting Cycle

Series of steps followed when processing and reporting accounting information.