The preliminary balance sheet is the first phase that must be carried out in order to complete the accounting cycle of any company. It is a process that provides information to understand the financial situation and make decisions with reliable data.
When companies want to know their financial situation, they must resort to the documents generated by accounting management. To do this, it is necessary to complete the accounting cycle , which must comply with various phases to obtain accurate financial information. In this article, you will discover how this cycle begins.
Definition of accounting cycle
The accounting cycle is the set of operations or transactions that a company records, systematically and chronologically, in a period of time or financial year . These operations can be real (documented during the year) or formal (carried out at the end of the year to comply with an accounting rule or principle).
The accounting cycle is important because it is used to prepare, analyze and compile financial information that will be presented to management and shareholders. To obtain this information, the journal entries and vouchers for these records are considered, which are used to compile the financial statements.
How does the accounting cycle start?
The actions that are concentrated in the accounting cycle must be carried out in a logical sequence or order. In addition, they need to be done using the appropriate procedures, establishing specific time periods for presenting the financial information.
To start the accounting cycle, it is necessary to start by preparing the cpa email lists preliminary balance sheet . This document contains the financial information from the previous year , from January 1 to December 31, to show the company's assets. Thus, the transactions and related documents are collected, analyzed and interpreted.
Likewise, this balance sheet must record all the inventory available in the company. Then, based on the information collected, a series of phases must be carried out to complete the accounting cycle in its entirety.
Phases of the accounting cycle
After preparing and analyzing the preliminary balance sheet of the company, the necessary information is obtained to complete the following phases:
Make the opening entries in the accounting. This involves recording the preliminary balance sheet of each account in the journal and in the general ledger. The accounts for assets (assets, rights and economic resources), liabilities (debts and payment obligations) and net worth (sum of assets, rights, debts and obligations) must be documented.
Adjusting stocks. All product and raw material stock accounts must be charged in the opening entries. This account has no movement during the financial year, but its variation is recorded at the end of the period.
Record the operations of the fiscal year. Each of the operations carried out during the fiscal year must be recorded in the general journal and in the general ledger, classifying the transactions in each of the corresponding accounts.
Prepare the trial balance of sums and balances. It is used to verify that the entries made in the journal are also recorded in the balance sheet and profit and loss accounts of the general ledgers.
Determine the accounting result calculation. The aim is to determine the profit or loss that the company has had during the financial year. Then, it must be confirmed that the information is the same between the accounting books.
Make closing entries. Closing entries for the financial year must be recorded, settling the net worth and liabilities accounts, as well as the asset accounts. It is also necessary to check that the records are correct.
Analyze the annual accounts. This involves analyzing the final information to prepare the balance sheet for the year, the profit and loss account, the statement of changes in equity and the statement of cash flows.
Distribute the result. Finally, the results obtained at the end of the period must be determined in order to then distribute the result among the company's management and shareholders. With this data, decisions can be made with reliable information.