Journal Entries And The Accounting Cycle
Journal Entries are a form of accounting record used to keep track of important financial information. They are usually created during each period of the accounting cycle. The cycle begins with the preparation of an unadjusted trial balance and ends with the drawing up of financial statements for the period in question.
In the first stage of the accounting cycle, the accountant prepares a listing of all the businesses accounts. This listing is referred to as an unadjusted trial balance. This listing includes all the balance sheet accounts, such as cash, accounts receivable, inventory, investments, buildings and equipment, and accounts payable. It also includes all the income statement accounts, which includes salaries and wages, sales, advertising, depreciation, and income taxes. These accounts are referred to as the accounts that are “on the books.”
In the second stage of the accounting cycle, entries must be made to the unadjusted trial balance. These entries are known as journal entries. Journal entries are used to record such items as purchases, sales, payroll, vendor payments, and revenues. Each journal entry must be balanced and should include a debit and a credit entry. Debit entries increase asset and expense accounts. Credit entries increase liabilities, equity, and revenues.
In the third stage of the accounting cycle, adjustments must be made to the accounts. Adjustments are necessary because of the timing of certain business transactions. For example, part of the cost of a purchase may not have been paid when it was recorded in the unadjusted trial balance. The unpaid portion of the purchase is recorded as an adjusting entry as a payable. Other adjustments may be required to account for depreciation or for other accrual-type items for which cash has not been paid or received.
In the fourth stage of the accounting cycle, the adjusted trial balance must be prepared. This trial balance includes all accounts that will be reported on the balance sheet and the income statement. The adjusted trial balance is used to prepare the financial statements for the period in question. These financial statements include the balance sheet, the income statement, and, if required, the statement of cash flows.
In the fifth stage, the accountant must review the financial statements and disclose any items that may impact the understanding of the financial statements. These items could include notes on items such as accounting methods, significant changes, or commitments made during the period. The notes should be written so that investors and other users understand the business.
The sixth and final step of the accounting cycle is the preparation of a closing journal entry. This entry is used to transfer the income and expenses from the income statement to retained earnings. The retained earnings account reflects the cumulative amount of earnings that have been generated by the business since its inception.
Journal Entries are an important part of the accounting cycle that helps the accountant record, track, and report financial information accurately. They help the accountant to adjust, prepare and report the business financial information that investors and lenders rely on to make decisions.
