The accounting cycle is the accounting process of recording, summarizing and presentation of business and financial information to a company’s interested parties. The accounting process consists of a series of steps or stages of the accounting cycle, which serves as the logical progression of carrying out related accounting tasks. Important tasks in the accounting cycle include the recording of business transactions, adjustment of entries, summarizing of account information, verification of information in accounts and preparation of financial statements Diagram 1 shows accounting cycle Transaction Journalizing.
The accounting cycle begins with the identification of business transactions and recording them in the original journal entry books. Company record business transactions as transactions take place during an accounting period and also make adjusting recording on accrued revenues and expenses that are not linked to specific transactions. Transaction journalizing helps collected financial information on different transaction accounts used as the source in later stages of the accounting cycle. Account Posting Account posting refer to posting previously recorded transaction information from journal books to a company’s general ledger. A general ledger is a collection of all accounts that are organized in the order in which they appear in future financial statements, which often start with asset, liability and owner’s equity accounts, followed by various revenue and expenses accounts.
Transferring account information from journal books to the general ledger helps better classify and summarize the account information by individual accounts rather than by transaction dates. Trial Balancing Information recorded and posted is checked later to make sure that it is free from flaws. Companies use the so-called trial balance to demonstrate the mathematical equality of the debits and credits from earlier recording and posting. A Trial Balance is a list of all accounts of the general ledger and their balances, with all debits in one column and credits in another column. Absence of any recording and posting errors, the total of the two columns must be balance with each other.
Statement Preparing The accounting cycle ends with the compilation of financial statements and the execution of necessary closing entries. Financial statements are the most important reports of a business. To compile these financial statements, companies use the verified information in the trial balance to fill out statement accounts with the amount of account balances found in the respective accounts in the trial balance. The purpose of these statements is to show the reader the financial position, financial performance and cash flow of a business as well as other useful information about the business.
Financial statements are usually prepared once a year at the end of an accounting period. Any temporary accounts such as revenue and expense accounts are closed to show zero balance in the general ledger so that they are ready for the recording for the next accounting cycle. Characteristics of Business Organization Sole proprietorship Unlimited liability Owner takes full responsibility for anything happened which relates to the business. If the business cannot pay its bills, creditors can come to the personal assets of the owner, including the owner’s home and family bank accounts. Likewise, a court ruling against the business will appear on the owner’s credit report as a personal debt. Profit or Loss A sole proprietorship may have only one owner.
Thus, sole proprietor alone is entitled to all profits and losses of business. He carries the complete risk, and there is no one to share profits or losses compared to partnership and company. Management The sole trader manages the entire business itself. He prepares the plans and carries out it under his own supervision. He does not need to consult someone else to make decisions.
The ultimate authority to manage and control lies with the owner. No Legal Entity Sole proprietorship has no own legal entity from its owner. Owner and business are the same in the eyes of the law and the public. Obligations of the business should be regarded as the obligations of the sole owner. Likewise, the life of the business depends on the life of the owner. This means in the event of mishaps in the life of sole proprietorship may end the life of the business.
Partnership Unlimited Liability All partners except limited partners, including industrial partners are personally liable for all debt incurred by the partnership. If the partnership is unable to settle its obligations, creditors’ claims on the personal assets of the partners will be satisfied without prejudice the rights of the separate creditors of the partners. Profit or Loss The basic motive of forming a partnership is to earn a profit. The more sales you generate, the more profit you make. This profit is divided among the partners according to the agreed proportion.
If there is a loss in sales, it will be sustained by all partners except the minor. Management In most partnerships, the partners are involved in the operation of the business. Their regular involvement makes critical decisions easier, as formal meetings are not required to get approval before action can be taken. If the partners agree on a change in strategy or structure, or approve a purchase of necessary equipment, no additional approvals are required. Number of partnership There must be more than one person to form a partnership.
Types of business partners can be any, but there are limitations for the maximum number of partners. In case of normal business, the partners must not be more than 20. In the case of professional partnerships, it must not more than 50 partners. Company Limited Liability The liability of a company’s shareholders is limited to the nominal value of the shares held by them. In case of liquidation, the maximum loss of a shareholder is equal to the nominal value of the shares held by them. The creditors have no claim to the personal assets of the shareholders in the event of liquidation Management A company is administered and managed by its managerial personnel, which is the Board of Directors.
It is not possible for all shareholders to participate in management. The shareholders are merely the holders of the shares in the company and do not necessarily have to be the managers of the company. Ownership The ownership of a company is spread over a large number of people. A private company can have a minimum of two members and a maximum of fifty members. While no upper limit is set on the maximum number of members in public companies.
Transferability of Share Shares in a company are freely transferable, subject to certain conditions, such that no shareholder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee enters the transferor’s shoes and acquires all the rights of the transferor in respect of those shares.
