What Happens If The Accounting Cycle Is Not Followed?

What Happens If The Accounting Cycle Is Not Followed? 1

What Is the Accounting Cycle? The accounting process comes after very specific recommendations and includes an accounting cycle flowchart. The accounting routine contains ten steps from determining what is a transaction to documenting the transaction properly to reconciling your trial balance. The purpose of the accounting cycle, if followed properly, is to attain accurate financial statements that show the true state of your business, it’s profits or deficits. Any business that fails to follow the accounting cycle could find these are lost in an influx of numbers that make no sense along with inaccurate data. A lot of things can go wrong if the accounting routine is not implemented.

If you’ve ever applied for any sort of business loan or credit, you were probably asked to produce a reconciled balance income and sheet and expenditure declaration. In case your accounting cycle isn’t followed correctly, both these documents shall be wrong. The worst part might be when the banker or a financial company realize your details are incorrect, which is not only embarrassing, but it may become a bigger headache to improve.

General Ledger – The overall ledge is a location where most journal entries are created. Specific Journals – Journals may also be specific such as a sales cost and journal of sales journal. Controlled-Schedules – Schedules that is controlled is usually those that need to keep an eye on something such as inventory, payables, and receivables.

Trial Balance – The trial balance is a compilation of all the data extracted from your ledgers, publications, and schedules. In the correct trial balance, all the credits and debits taken from your ledgers, publications, and schedules must be equivalent. Income and Expense Statement – This shows your sales revenues clearly, less adjustable and fixed expenses to convey your profit or loss. Balance Sheet – The total amount sheet is considered a snapshot of your business at any given point in time and contains summary accounts of your assets, liabilities, owner equity, and world-wide web loss or income.

Beginning with first defining everything that is a transaction and posting or documenting it in the correct way and time, enables the accounting cycle to be examined and accurate. To further help you in understanding the accounting cycle, download a Sample Accounting Cycle Flowchart which may be within our Accounting Media Gallery. The accounting flowchart shows an obvious description on why transactions have to be identified, the posting stages, credit, and debits, so when journal entries should be produced.

The flowchart also shows when adjusting journal entries are needed, the importance of reconciling the trail balance, implementing closing entries and working your last financial reviews for the accounting period. What Could FAIL? Let’s say you own a flower shop. Missed Journal Entries – Say you have two flower suppliers and receive inventory on two separate days.

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Not only do you be able to quickly observe how much flower inventory you’d, if you had a need to purchase that inventory you wouldn’t realize you owed your supplier money if you didn’t credit your accounts payables. This may cause understating your true inventory on the balance sheet as a secured asset and falling behind in paying your inventory provider, losing that supplier possibly. On a monthly basis Ineffective Reconciliation – In the event that you don’t balance your cash in a bank account each and, you can lose an eye on actual cash.

The cash amount that shows up on your financial statements could be incorrect. Failing to reconcile your accounts receivables could result in businesses that owe you money going beyond the set period you agreed on for payment. In the event that you don’t reconcile accounts payables, you could be late paying your suppliers. Incorrect Trial Balance – If you don’t record your transactions and reconcile accounts accordingly, your trial balance will be incorrect.

A trial balance in the beginning of the accounting routine has a newbie balance, debits and credits for transactions posted throughout the accounting period, and an ending balance. If you add up all of your credits and debits and they don’t match, the amounts that pull from the trial balance to your income and expense declaration and eventually your balance sheet will be inaccurate. Missed Income & Expenditures – In the event that you neglect to record the cost and sales of sales and other expenses improperly, you don’t know how much revenue you made really. What if you made a profit but the income and expense statement didn’t show that due to inaccurate posting?

Not only would the income and expenditure declaration show a loss, so would balance sheet. Erroneous Balance Sheet – If your expenditure and income statement are wrong because your trial balance was wrong, balance sheet might show stuff like over or understated property, inaccurate liabilities, owner equity problems, and misstated profits even.

What Happens If The Accounting Cycle Is Not Followed?
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