Accounting Cycle Steps in the Accounting Process

Robert (Bob) Steele
A free video tutorial from Robert (Bob) Steele
CPA, CGMA, M.S. Tax, CPI
4.3 instructor rating • 125 courses • 211,048 students

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Financial Accounting – Closing Process

Closing processes including three formats of the closing process helping us better understand accounting concepts

07:46:57 of on-demand video • Updated June 2019

  • Describe the closing process and its importance
  • Perform closing process using one journal entry
  • Perform closing process using two journal entries
  • Perform closing process using three journal entries
  • Describe the post closing trial balance
  • Define temporary accounts and permanent accounts
  • Understand fundamentals of Excel
English [Auto] Hello in this presentation we're going to be talking about the accounting cycle or the accounting process. That process that the accounting department will go through on a systematic basis over and over and over again typically thought of as a monthly process although it could be thought of as a yearly process or some other process in terms of the amount of time that will pass. But these are going to be the steps that will be gone through in terms of the accounting process. Always keeping in mind that in goal of financial accounting which are the financial statements some texts will have more steps than five as we have here some techs will have less than five steps. But their goal here is to really have a broad picture big picture so that when we think about the accounting process we can break down that that big picture view five's a pretty good number for us to be able to memorize and keep in our mind if we have more than that it can start to kind of muddy the picture. So once we get into each of these individual steps we want to get into more detail obviously. But when considering the overall picture. Five is a good amount of steps and it's enough for us to understand those different steps and understand the big picture view of what is going on as we go through the month. First up we're going to consider are the going to be the normal transactions those are the things that the accounting department is doing entering the invoices entering the bills dealing with payroll all the stuff that we generally think of in terms of the accounting department. We're going to group into step one. So in terms of timing Step one is far greater than any of the other steps because that's what's happening throughout the entire month. Everything else is basically happening pretty much at the end of the month. For example at the end of the month we're going to then reconcile the bank accounts. I'm going to include the bank accounts as a step in and of itself because it's really a huge internal control. Second only to the double entry countenance system itself and it's really defining that point in time in which we're moving from the normal business transactions to the next step which will be adjusting journal entries the adjusting journal entries will then be used to create the D adjusted trial balance which we'll be on and accrual basis or as close to 1 as possible in all of this happens again as of the end of the time period as opposed to what happens for most of the time period which are those normal transactions once the adjusting entries have been done we can finally make the financial statements. This is the end goal. We have the asterisks here because this is the end product that we're really looking for this is what the external users of the financial statements and most of the reports for managing accounting are wanting those financial statements. But notice it's Step 4 of 5 if not the end although that's the main event. We still have the cleanup process the closing process and that's going to be our final process. We'll have to close things out to get us ready for this whole system to start again at which time it will start again. So let's go through those steps and a bit more detail we're starting now. Once again with the record normal business transactions that's step one really what is going on and that entails mainly everything that we're doing throughout the entire month which is the payroll department the accounts receivable the accounts payable entering all the transactions bills invoices everything is going to be all included in step 1. So in terms of timing in this step is way bigger than the rest of the steps the rest of the steps are really going to be the things that we're going to have to do to refine this information down to make those financial statements and then be ready for the next time period. So these are going to be the steps where we have the normal journal entries we're compiling the data from the financial transactions that are happening we're recording all of those transactions to the general ledger the general ledger is being used to make the trial balance those are going to that we might have an automated system doing this we might not be intron journal entries but the journal entries are being entered in some way when we make an invoice. A journal entry happens when we make a bill journal entries happen when we you know write a check or a journal entry is happening. This is what's going on we're recording the data throughout the month. At the end of the month then that's when we got to decide OK the month is now going to close. We have to think about that cutoff. We're going to want to make the financial statements. That's the end goal as of the end of the month. And so with Step two bank reconciliations once we have all the transactions in there because cash is so crucial and involved in so many transactions it's a huge check a huge internal control for us to reconcile the bank accounts. We don't want to go to the adjusting process until we've reconciled the bank accounts. So once we're done with the month we're going to say let's reconcile the bank accounts meaning compare the bank balance of cash to our balance of cash determine exactly what the differences are make any adjustments we need to make and then reconcile in terms of what is outstanding and what are the outstanding checks what are the outstanding deposits that gives us assurance that our transactions are in there correctly both are cash transactions and because so many other entities are involved in cash. It's a huge check on our on our entire financial system. Then we want the accounting cycle in terms of the recording the adjusting entries so the adjusted entries are going to be those that are made as of the end of the month. In this case 7:31 all of them are made as of the end of the month. Those are our time in journal entries meaning we're making sure that our financial statements are correct on accrual basis. Looking at those accounts that always need adjustment those accounts like prepaid insurance and accumulated depreciation. And we have inchers payable and unearned revenue. Those accounts that typically are going to need some type of adjustment. And that's just the way the system is built. So we're going to put those journal entries in there in order to make our financial statements correct. As of the date that the financial statements are being generated then we're going to take this adjusted balance to one that is now been adjusted in terms of those adjusting entries to make them on and accrual basis or as close to it as possible and use them to create the financial statements the end product. This is what we're trying to get to the balance sheet the income statement and the statement of owners equity in terms of financial accounting. This is our product that is going out to the external users also the product that's mainly going to be the basis for most of the man and general accounting reports used on an internal basis as well. So this is the main event. And you might think it should be the last step. And it being the main event but it's not the last step after we have the financial statements. We are then going to do the closing process and this is kind of like if we had the main events being a Super Bowl or something like that then that closing process is cleaning up all the stadium afterwards in order for us to start the process over again. That's what we're doing in the closing process. We're going to take that adjusted the balance which we use to make the financial statements and we're going to close out those temporary accounts those accounts that are kind of like the scoreboard accounts those revenue accounts those income statement accounts those drawls accounts those are going to be these items down here and those then are going to be zero at the end. Why. Because as of the first day of the next month we want them to be at zero just like we want a scoreboard in the new game to be zero so that we can start counting up again from that point forward. So those are going to be the five steps you want to keep in mind. And when you have a broad view and thinking in terms of what the accounting process is going to be you want to have these five steps in mind say no what is going on from that level meaning starting with the normal business transactions. And again in terms of time that's what's going on most of the time the whole month. That's basically what go on what goes on the end of the month. Obviously a busy time for the accounting department because we need to reconcile the bank accounts then do the adjusting journal entries then the financial statements the main event and then we do the closing process in that point and then we can start over and do the next process again in that order. At this point just want to note that smaller companies may not be required to issue publicly you know financial statements to the public and therefore they may not be as diligent in terms of their bank reconciliations and their adjusting entries and the creation of the financial statements as they should be and they might be depending. Typically possibly yearly to get help from an outside CPA firm at least to make the financial statements to generate the tax returns. So just realize that if you're in a smaller company that there could be some differences in terms of just exactness of the accounting process from month to month. The larger the company that will be the more systematic we're going to have the process basically down from month to month although of course there will also be more detail involved when we get into the more detail of each of these steps within the process. If you would like more information about the accounting cycle and related topics we recommend accounting construction reference number 300 which will provide the topics in a relevant order so you can zero in on those topics you would like to get more information on. And look at the references and materials needed in order to get more information on them within the text as you zero in on what you want to look into. We also are going to have links in just about every image which will give more free information about that topic including instructional videos more text games and puzzles or.