Critical Review Determination Of Accounting Standards Accounting Essay

The importance of accounting

Knowing how to interpret and how to use it is crucial for every company. “Information which is given to outside parties that have an interest in a business is sometimes called financial accounting information” as per Williams, Haka, Bettner and Carcello (2006, p. 4.). The primary reason for providing financial and accounting information is the need to use this information for decision-making. Many organizations, including those of corporate management as well as government regulatory agencies, suppliers and creditors utilize financial data in a variety of ways to evaluate the financial health of a business and its capacity to meet its obligations when these obligations are made current. Personnel and companies must be aware of the various aspects of the accounting process and how these steps can give reliable information to individuals who are using financial data.

What exactly is an Accounting Cycle?

A cycle of accounting is described as the “sequence of accounting processes used to document, categorize and summarize accounting information in periodic financial reports” (p. 95). The finalization of financial statements that are formal starts by recording transactions in the business and then this process is repeated so that the business can prepare fresh, current accounting statements in the wake of the business transactions carried out by the company. The accounting cycle consists of eight stages and comprises journalizing transactions and posting journal entries into ledger accounts, creating the trial balance, making the necessary adjustments at the end of each period making the trial balance that is adjusted, making financial statements as well as journalizing and posting closing entry and creating closing balances after the trial has closed.

Be aware that debits add value to assets and credit accounts increase equity for the owner in the recording and adjustment stages of this cycle of accounting. A bank account “has only three components: (1) a title; (2) a left side, which is known as the debit side, and (3) the right side, known as”the credit-side” (p. 95) These accountings are referred to as T accounts since the paper account’s recording resembles the letters “T.” The following typical T account is as follows:

The balance of the account is determined by the difference between side of credit and debit. If the total of the debit is greater than the credit amount, the account is said to be having an account balance for debit. If the credit amount is greater than the debit balance, the account is believed to have an account balance. In accounts with assets debits, the recording of debits raises the amount in the account for assets, while credits decrease the balance in the account. In the liability and owners’ equity account, the deduct reduces the amount of money in the account, whereas crediting increases the balance in the account. This is in line with the equation

and is also known as the double-entry accounts.

Journalizing Transactions

The initial step is to enter the business transactions in journals, which record the transactions of the business in chronological order (day-by-day). The funds recorded in this section will be transferred to the credit and debit areas of the accounts in the ledger. Investors in the company pays $80,000 in cash for shares in the company. The two accounts affected by this exchange are Cash Capital Stock and the Cash Capital Stock. The first step to journalize this entry is to enter the account’s name debited (Cash) that is entered first, with its dollar amount in the left-hand column of the money column. The account’s name that was credited (Capital Stock) is listed below Cash and is indented towards the right and the dollar amount being entered in the right-hand column for money. The description for the operation is included beneath each journal entry. Here is a sample journal entry:

Posting to accounts in the Ledger

“Posting simply means that you update the ledger accounts to reflect the effect of the transactions that are recorded in the journal” (p. 98).). If the reader listens to the journal entry it means that the journal entries prior to it are described in the form of “Debit Capital Stock, $80,000 cash; Credit Capital Stock $80,000.” The person copy the journal entry amount to the ledger general which is a set of entries from T accounts; this is done within the ledger in the following manner:

The process continues to ensure that all journal entries recorded in the ledger. When all journal entries have been calculated then the next step will be the creation for the balance trial.

Trial Balance

This trial balance was created in order to make sure that credit and debits are equal. All ledger balances are listed “with debits on the left and credit on the right” (Internet Centre for Business and Management 2007). A debit column will be first added before that of credit. If the sums do not match, the problem may be due to a debit being recorded in lieu or a credit. This could be due to errors in arithmetic, or mistakes in recording balances of accounts onto your trial balance. Both columns must be equal, but this doesn’t mean an account was credited to the incorrect account. A sample balance from a trial account is shown below:

Making End-of-Period Adjustments

Adjustments are made after the trial balance has been created to keep track of accrued, deferred, as well as estimated amounts before post the adjusted entry into the accounts in ledger. After the entries are recorded into the ledger, the accountant will prepare an adjusted balance that follows the same steps as the trial balance that was not adjusted, however, the adjusted balance has the adjusting entries. Accrued items include salaries or interest income as well as not-billed revenue. Deferred entries could include insurance prepaid as well as office supplies and depreciation.

Preparing Financial Statements

“Publicly owned corporations-those that have shares that are listed on a stock exchange-are required to disclose quarterly and annual reports to their stockholders as well as to the general public” (Williams, Haka, Bettner and Carcello 2006 p. 219). The financial statements consist of the income statement as well as statements of earnings retained as well as the balance sheet along with the statements of cash flows (also called the statement of cash flows). It is created first since it determines the net income reported in the report of retained earnings. A statement on retained earnings will be created following to provide the information needed to the balance sheet. This balance sheet created using the assets, liabilities and equity balances of the business. The statements of cash flow are created using information from the various financial reports.

Preparing Closing Entry entries to Journals and Ledger Accounts

Close journal entries to close accounts that are temporary, such as revenue and transfers these accounts to an income summary account that is temporary. The balance is transferred to the account of retained earnings which is a capital account. similarly, withdrawal or dividend balances are converted to capital. Closed entries are transferred onto the ledger account. Following these actions, an after-closing trail balance is established to ensure that debits are equal to credits. Error-checking is completed and corrections are completed to the trial balance.

The importance of the Accounting Cycle Re-visited

Every company prepares financial statements. It is essential that accountants are aware of the accounting process to ensure correct entry of data and reliable financial data output. The accounting cycle consists of eight steps. cycle, from journalizing of business transactions through creating after-closing balances. Without accounting the data contained in financial statements wouldn’t be accurate, and the decision-making process are difficult to execute by those who use financial data.

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