THE ACCOUNTING CYCLE

Learning Objective: Complete the Accounting Cycle

What is accounting cycle?

The accounting cycle is a comprehensive process that encompasses recording and processing all financial transactions within a company. It involves several essential steps, ensuring accurate financial reporting. Let’s delve into the eight crucial stages of the accounting cycle:

1. Identify the Transactions: The cycle begins with financial transactions. These may include debt payments, asset acquisitions, sales revenue, or incurred expenses.
2. Prepare the Journal Entries: Next, these transactions are recorded chronologically in the company’s journal. Debits and credits must always balance.
3. Posting to the General Ledger (GL): The journal entries are then posted to the general ledger, where a summary of all transactions to individual accounts is visible.
4. Prepare the Trial Balance: At the end of the accounting period (which can be quarterly, monthly, or yearly), a total balance is calculated for each account.
5. Prepare the Worksheet: If the debits and credits on the trial balance don’t match, the bookkeeper investigates errors and makes corrective adjustments, which are tracked on a worksheet.
6. Adjusting Entries: As the accounting period concludes, adjusting entries are posted to account for accruals and deferrals.
7. Financial Statements: Using the correct balances, the balance sheet, income statement, and cash flow statement are prepared.
8. Closing: Revenue and expense accounts are closed and zeroed out for the next accounting cycle. Balance sheet accounts remain open, reflecting the company’s financial position at a specific point in time.

Remember, the accounting cycle repeats itself annually as long as the company remains in business. It’s the backbone of financial record-keeping, ensuring transparency and accuracy in financial reporting

The Accounting Cycle for a Merchandising Business

A merchandising business is one that buys and sells goods without altering their physical form. Unlike service businesses, which provide intangible services, merchandisers deal with tangible products.

In this article, we’ll explore the accounting cycle specific to merchandising businesses.

Basic Merchandising Transactions:

• Purchases: When a merchandiser buys inventory (goods for resale), it records the transaction in the Purchases account.
• Purchases Returns: If any inventory is returned to suppliers, it’s recorded in the Purchases Returns account.
• Purchases Discounts: Discounts received from suppliers for early payment are recorded in the Purchases Discounts account.
• Freight-in: Transportation costs incurred to bring inventory to the business are recorded in the Freight-in account under the periodic inventory system1.

Merchandising Income Statement:

• The income statement for a merchandising business includes the following key components:
• Net Sales: Calculated as Sales - Sales Returns - Sales Discounts.
• Gross Profit: Derived from Net Sales - Cost of Merchandise Sold.
• Net Income: Computed as Gross Profit - Operating Expenses