With so many transactions happening day to day, a bookkeeper or accountant must be highly organized. There is a natural cycle transactions go through from start to finish. A transaction comes into the book of original entry and eventually ends up on a financial statement at the end of the month. But there are a few other stops in between.
Purchases, sales, payments and collections-these are the day to day transactions of most businesses. Typically, at the end of the month, the debits and credits recorded are totalled by account category. The amounts are then recorded in the accounts of the general ledger. This process is known as posting.
One must be aware that transactions are not always recorded in the period they occur. This is common with businesses which offer services occurring continuously over time but that are paid for at different intervals. To compensate for this, an adjusting entry must be made. Adjustments are also made for assets that depreciate, liabilities and interest on debt and taxes.
A complete bookkeeping cycle is most often one year. At that time, the recorded adjustments are recorded in the accounts by way of the general journal. Even though month end adjustments are made for the financial statements, they often are not recorded into the accounts themselves until the year end.
The bookkeeping cycle is finished by closing the books. The books are closed out at a zero balance. A general journal entry is made that returns all revenue and expense accounts to zero. Next, the net difference between the credit and debit amounts, the net income or loss, is transferred over as ownership equity. With the books at zero, the company is then ready to begin the next bookkeeping cycle.