A full accounting cycle is made of a number of steps. For the purpose of this study, we shall demonstrate this cycle in ten logical steps and also attempt to demonstrate their impact on the financial statements. The effect s of leaving out one of the steps will also be explored.
Analyzing transactions
Here the company looks at all the source documents describing the transactions and events from either hard or soft copies. They include bank statements, purchase orders etc. These form the foundation of the accounting function. Getting information wrong in this step translates to a whole wrong accounting work.
Journalizing
This involves the use of double entry accounting to classify transactions. This means that each transaction must have two corresponding entries of equivalent amounts. One a debit and the other a credit. Failure to get the debits and credits correctly usually leads to misstatements in the financial statements.
Posting
The third step is posting which involves transferring the information in these journals to the general ledger. These must be posted correctly
Preparations of Un-adjusted trial balance
An unadjusted trial balance is prepared to try and verify whether all debits equal to credits. This lists all transaction accounts and their balances at a particular point in time. Its prepared before adjusting entries are done. A trial balance is basically used to verify that all debits are equal to credits; it never means that there are no errors in the accounts.
Adjusting entries
This involves preparing entries that adjust any errors that may be in the accounts. This ensures that assets and liability accounts are brought to their correct balances and also updating the revenue and expense accounts.
Preparation of the adjusted trial balance
Afterwards an adjusted trial balance is prepared. Adjusting entries are usually made at the end of the accounting period to ensure that the final accounts are free from misstatements.
Preparation of financial statements
Final financial statements which include the statement of comprehensive income, the statement of financial position, the statement of changes in equity and the cash flow statements are prepared.
Closing entries
These are entries prepared so as to get the books ready for the following accounting period. These entries are prepared at the tail end of the accounting process after preparation of the financial statements.
Preparation of post closing trial balance
Also known as the opening trial balance, it assists accountants to get the breakdown of all accounts of permanent nature. It’s majorly prepared to ensure that all debit accounts equal the credit accounts and all temporary accounts equal zero.
Reversing entries
Reversing entries are used to adjust accounting statements in the following financial periods. They are however optional in the accounting cycle.
Omission of one of this steps may lead to serious problems in the accounting cycle in terms of accuracy and authenticity of the resultant financial statements
What are reversing entries?
As explained above, these are entries used to adjust financial statements in the following financial period after the accountant decides that an adjustment is necessary. They usually arise after financial statements have been prepared and probably audited and a report issued. The management always has an option of deciding whether to reverse such adjustments of not.
The benefits of reversing such entries is that they ensure that the financial statements prepared in the following period are Prepare accurately and represent a true and fair view.
Reversing entries are often employed when there has been an accrual that was posted as an adjusting entry on the last day of the financial period.
Reversing entries ensures that accountants avoid the pitfall of double counting. They also ensure that expenses are recorded in the correct period in which they occur. They are simple to compute and post. Even people with very limited accounting knowledge can do reverse entries
The major limitation of using reversing entries is that ne needs to ensure that the correct reversing entry is passed otherwise the accounts will not be correct.
Who are the stakeholders in this situation?
The stakeholders include:
I)The creditors who rely on the strength of these financial statements to extend credit facilities to the company
ii) The bankers who are expected to extend loan facilities on the basis of these financial statements that are misleading.
iii)The government, who rely on the financial statements in determining taxes to be levied to the company,.
iv) The shareholders who have entrusted the running of the company to the management. They are interested stakeholders since the financial statements have a direct relationship with their earnings.
v)The general public who may have had access to these financial statements and who may be considering to invest on the company on the strength of these financial statements.
Ethical issues in this situation
Management is expected to prepare financial statements that are free from material misstatements and reflect a true and fair view of the state of affairs of the company at any particular reporting period.
In this case, while we must appreciate that the misstatement was occasioned by an error and not an intentional misstatement, the attitude of the management towards the stakeholders is wanting.
It’s expected that the president would be alarmed by the misstatements in the financial statements but he only intends to adjust the statements in the following period without giving much thought to the other stakeholders, he in fact insists that that which is unknown doesn’t hurt. Such an attitude poses serious ethical issues in the organization.
As the finance controller, I would analyze the situation from the perspective of the requirements of accounting standards such as the IFRS’s and IAS.The accounting standards dictate that incase of misstatements that are noted after accounts have been issued, then the treatment for the adjustments that follow will depend on whether the company is an SME or is a company adopting the full IFRS’S. in case of SME’S the standards do not require disclosure of any adjustments while company’s adopting full IFRS’s should reverse the given entries as prior year adjustments and explain in a note to the financial statements what this adjustment relates to.
