About the Accounting Cycle

Madhuri Dange

March 25, 2022 11:25

The following topics address the accounting cycle:

Journal Entry Creation from Transaction Processing
About General Ledger Updates
About Monthly Closing
About Financial Statement Creation

Journal Entry Creation from Transaction Processing

Accounting information is usually reported on a monthly, quarterly, and annual basis. Most transactions are recorded based on a period, such as a calendar month. During a standard month, a company engages in business transactions that warrant accounting classification and recording. Listed below are some examples of business transactions and the related journal entries that are created.

Journal Entry #1: Sales Order Processed

The Demo Association sells 4 T-shirts at $25 each on May 1st to the Sacramento Piping Company on account, based on a purchase order received.

Accounts Receivable

Sales

(Debit)

May 1 $100

(Credit)

(Debit)

(Credit)

May 1 $100

In this journal entry, the sale of the t-shirts is recorded as a credit to the Product Revenue account, as this sale results in increased revenue for the T-shirt product. However, the purchase was made using a Purchase Order, so the Accounts Receivable account is debited for the amount of the sale.

Journal Entry #2: Cash Receipt Processed

The Demo Association receives a payment from Sacramento Piping on May 15th for the shirts.

Accounts Receivable		Cash
(Debit)	(Credit) May 15 $100	(Debit) May 15 $100	(Credit)

Once the payment is received, the Accounts Receivable account is credited for the amount, clearing out the debit recorded at the time of the initial sale. The Cash account is debited for the amount of the payment. This is because in the double-entry accounting system (covered in more detail further in this appendix), assets are debited when that account balance is increased.

About General Ledger Updates

Transactions are created in sub-ledgers on a daily basis, as noted in About Ledgers. The timing of the update to the General Ledger (GL), however, is usually based on each organization's business practices.

Some companies update transactions to the General Ledger on a daily basis, which allows for the creation of weekly Profit and Loss Statements. These statements are not complete, however, because certain transactions, such as depreciation or interest payments, are calculated on a monthly basis. These two additional transactions are accomplished outside of Aptify. These financial statements are therefore referred to as Preliminary Profit and Loss Statements.

Other organizations update the general ledger on the final days or days of the month. Waiting for end-of-month to update the general ledger is a practice that most Financial Consultants do not recommend because there is a shorter time frame to identify errors or problems, perform proper research, and to prepare the appropriate correcting journal entries prior to the creation of financial statements.

General Ledger Updates in Aptify

Aptify acts as a sub-ledger system for an organization. Within Aptify, GL account entries are created, to be processed as necessary in the organization's accounting package once the information is exported. Additional financial functions, such as calculations of depreciation for value or recording interest payments, are handled outside Aptify.

In Aptify, the creation of journal entries and the related update to the General Ledger occur in three stages.

Stages	Summary Description	Detailed Description
Stage 1	Journal Entry Creation	A Journal entry is created as a result of certain transactions executed in Aptify.
Stage 2	Batching	Transactions are selected from the Orders, Payments, or Scheduled Transactions entities in order to create a summarized journal entry batch. An output file is created that will be imported to the General Ledger.
Stage 3	Import to General Ledger	The output file created in Stage 2 is imported into the General Ledger accounting package of the organization's choice.

About Monthly Closing

The process referred to as the Monthly Closing relates to the "cutoff" of transactions for a defined period in order to create financial statements for that period. This process of "cutoff" allows organizations to clearly identify which transactions took place in which periods and to measure the financial impact on the organization in terms of profit and losses or changes in assets and liability balances. The summary below describes key activities that take place during a "Monthly Close":

Transactions are updated from all sub ledgers to the General Ledger.
Sub ledger balances (such as Receivables, Payables, Inventory, and Sales) are agreed to General Ledger balances. This means the total of the sum of the sub ledger accounts balances with the amount in the General Ledger.
Direct and recurring Journal entries are recorded in the General Ledger for corrections and adjustments. These include regular bank service charges, interest credits, outstanding checks, and so forth.
Preliminary financial reports are created.
Analytical review procedures are applied in order to identify any unusual changes in financial statement balances. This involves examining trends in revenue and expense line items to check for any discrepancies between what was recorded and what was expected.
Financial statements are created for reporting purposes.

About Financial Statement Creation

In previous years, financial statements were created using spreadsheet applications. Now most accounting software packages, such as Solomon Accounting, Great Plains, Ross Systems, and others, provide report-writing capabilities, including predefined financial statements and other reports.
Once all the elements of the Monthly Closing process are complete, a predefined report is run, and financial statements are created automatically.