Posting Business Transaction - Course Work Example on Accounting

The accounting cycle involves various documents. During a transaction, documents are produced. The documents provided may be internal, inter-office sales, for example. Most of the time, though, these documents are external to the business. The record materials produced during a transaction are called Source Documents. Such records include a receipt, monthly bank statement, purchase order, and monthly electric utility bill.

The first step in the procedure of business transaction includes identifying and analyzing business transaction. This step is especially crucial because not all transactions carried out are for business purposes. Some events such as taking a personal loan are, therefore, not included in the accounting system. The identifying and analyzing step of the cycle serves to isolate such transactions by determining which accounts have been affected and by what amount (Nasution, 2016).

After identifying and analyzing the transactions, they are recorded in the Journal. The relevant information from the Source Document is transferred to the Journal while applying the double-entry system of bookkeeping. The Journal entries are recorded in at least two accounts. One account should be debited and another credited for the same amount. Transactions such as purchases, cash disbursements, sales, and cash receipts frequently occur in business. For this reason, specialized journals are used in recording such transactions the most common of these being the General Journal. Examples of scenarios recorded in the General Ledger include accumulated depreciations, opening balance, pre-paid costs, deferred revenue, stock transactions, year-end results, reevaluation of currency, write off negative, and positive items (Nasution, 2016).

Transactions are first recorded in the Journal since it is loaded with all the particulars of a transaction. The Journal also details information from the Source Document hence the title Book of Original Entry. The Journal forms the basis of sourcing for the Ledger.

The entries from the Journal are then posted into the Ledger. This phase of accounting is the classifying stage. Information in the Ledger also shows changes made to all the affected accounts from the previous transactions. It is then easier to determine each account balances after the transfer of all transactions to the Ledger. The General Ledger compiles information of accounts which are broad in nature. Such accounts include Accounts Receivable, Accounts Payable, Cash, Supplies, among others. For example, journal entries crediting and debiting the Cash are transferred to the Cash account in the Ledger. It is, therefore, possible to determine the final Cash balance since the decreases and increases can be calculated and totaled.

The T-account is a graphic representation of accounts. The T-account representation shows just the basic elements of an account such as the unique account name like Cash for easy reference, it, however, lacks relevant detail for book-keeping; it only contains information as is in the Journal. The T-account format includes the Debit and Credit columns. The balance can be arrived at by totaling each column first then subtracting the lesser subtotal from the greater subtotal. The difference is then placed in the greater totals column. The T-account is important because it serves the purpose of quickly summarizing the balance of an account.

In one report, all account balances gathered in the Ledger extracted and transferred to an unadjusted Trial Balance. The sum of all debit balances is calculated, credit balances are also added to find their sum. The two sums should be equal. Correcting entries are made reverse effects if there are errors discovered. It is important to note, though, that even if the debit and the credit totals match, some errors may still exist. Such errors as failure to record a transaction or double posting would still go undetected. The purpose the Trial Balance, therefore, not determining hoe correct the accounting records are, but only testing the equality of debit and credit sums.

After the preparation of the Trial Balance, adjusting entries are made. These entries are made following the Accrual Basis of Accounting. As the accounting period ends, the business may have earned some income but not registered in the books yet; or the company may have incurred some expense and not yet entered in the Journal (Johnson, Phillips, & Chase, 2009). Therefore, this stage of the accounting cycle serves to update the accounts before summarizing them in the Financial Statements. Accrual of expenses, prepayments, allowances, deferrals, depreciation, and accrued income are just among the adjusting entries made.

The next step is to prepare an Adjusted Trial Balance, and this includes the Adjusted Entries and its purpose is to test the equality of the debit and debit balances. After confirmation of the balancing of the debit total and debit total, a complete set of Financial Statements is prepared. This set includes a Statement of Cash Flows, Balance Sheet, Statement of Changes in Equity Comprehensive Income, and Notes to Final Statements (Johnson, Phillips, & Chase, 2009). The closing of accounts in a summarized account and corresponding capital account is done in the Closing Entries stage of accounting. These entries are made for nominal accounts such as withdrawal accounts, expense and income accounts.

Finally, preparing a Post-Closing Trial Balance serves to, once again, confirm equality of debit and credit totals. This Trial Balance contains real accounts only. In the case of erroneous posting of data from the Journal of the accounts, a new entry is created in the same accounts as the original. Then the amount of adjustment made for each. An entire entry can also be reversed by interchanging the accounts. It is possible by debiting the original entry and crediting the account that received the debit and posting the same amounts for each, then check the Trial Balance.

References

Johnson, B. G., Phillips, F., & Chase, L.G. (2009). An Intelligent Tutoring System for Accounting Cycle: Enhancing Textbook Homework with Artificial Intelligence. Journal of Accounting Education.

Nasution, M. N., (2016). A Deming Cycle as a Tool of Improving a Continuous Service Quality. The Indonesian Management & Accounting Research (IMAR).