GCH ACCOUNTING FIRM.

The accounting cycle is a fundamental process in the accounting of any company, from small businesses to multinational corporations. This cycle ensures that all financial transactions are recorded, processed and reported systematically and accurately. Its understanding is essential to ensure the transparency and reliability of financial information, which is crucial for strategic decision making in an organization.

Identification and Recording of Transactions

The accounting cycle begins with an essential step: the identification and recording of all financial transactions that affect the company. This meticulous process is the foundation upon which all other aspects of accounting are built, ensuring the accuracy and transparency of financial information. The components of this process are detailed below:

Identification of Financial Transactions

Identification of transactions is the first step in the accounting cycle and requires detailed observation and a clear understanding of all economic operations that impact the company. Includes, but is not limited to:

• Sales: The generation of income through the sale of products or services. Each sale is documented and verified to ensure that revenue and accounts receivable are recorded correctly.
• Purchases: Acquisitions of goods or services necessary for the operation of the company. Both cash and credit purchases are included, affecting the corresponding asset and liability accounts.
• Payments: Disbursements made by the company, either to settle debts, pay suppliers, or cover operating expenses. These payments reduce cash or bank accounts and reduce liabilities or expenses, as applicable.
• Receipts: Inflows of cash or equivalent, whether customer payments, refunds or any other inflow of money. They are recorded by increasing cash accounts and decreasing accounts receivable or other liabilities.
• Financial adjustments and other events: They include corrections, recognition of depreciation, changes in provisions for doubtful accounts, among others. These events may not be transactions in the traditional sense, but they affect accounting figures and must be recorded accurately.

Documentation with Receipts

Each transaction must be supported by appropriate documentation. These receipts are vital to validate the operation and to comply with legal and fiscal requirements. Among the most common types of receipts are:

• Invoices: Documents that detail the sale of products or services, including prices, quantities and payment terms.
• Receipts: Proof of payment that confirms receipt of money by the company.
• Contracts: Legal agreements that establish the conditions under which purchases, sales or services are made.
• Credit and Debit Notes: Documents that adjust previous transactions, either to correct errors or to reflect returns and discounts.
• Bank statements: Show all transactions made through bank accounts, including deposits and withdrawals.

Recording in the Journal using the Double Entry System

Once identified and documented, the transactions are recorded in the journal. This book is the first accounting record in which each operation is recorded. The adoption of the double entry system is essential here, since this method guarantees that for each transaction, the sum of the debits is equal to the sum of the credits, maintaining the balance of the accounting equation $activos=pasivos+patrimonio$ .​

• Debits and Credits: Each transaction is divided into two parts: a debit to one or more accounts and an equivalent credit to other accounts. For example, in a credit sale, the customer account is debited (assets increase) and the sales account is credited (income increases).
• Consistency and Accuracy: Accuracy in this record is critical. An error in the journal will propagate through the accounting system, affecting the trial balance and financial statements. Regular review and reconciliation of accounts are necessary practices to prevent and correct possible deviations.

Documentation with Receipts

Documentation with receipts is a pillar in accounting, as it ensures the transparency and legality of each financial operation. Invoices, for example, are essential for recording sales or purchases, detailing products or services, quantities, unit prices, taxes applied and payment terms. Receipts are proof of payments made or received, crucial for validating income and expenses and adjusting cash or bank accounts. Contracts and agreements, on the other hand, define the obligations and rights of the parties in more complex transactions, such as long-term services, loans or leases.

On the other hand, credit and debit notes adjust previous transactions, correcting errors or recording returns and discounts that alter the originally reported values. Bank statements are documents issued by financial institutions that reflect all transactions in a bank account, including deposits, withdrawals, interest, and bank charges. These statements are essential for bank reconciliation, a process that verifies consistency between the company’s accounting records and the movements reported by the bank, identifying discrepancies and ensuring the accuracy of cash accounts.

Together, these proofs form a safety net that allows companies to not only comply with regulations, but also effectively prepare for internal or external audits and possible inquiries from tax authorities. The meticulous management and archiving of these documents facilitates the traceability of each transaction, an invaluable resource in the era of financial transparency and accountability.

Transaction Classification

The classification of transactions in the journal is a meticulous process that ensures that each financial movement is correctly categorized according to its impact on the financial structure of the company. When you classify a transaction, you decide whether it affects asset accounts, such as cash, accounts receivable, or inventory; liabilities, such as accounts payable or loans; equity, which includes share capital and retained earnings; income, from sales or services provided; or expenses, such as rent, salaries, or material costs. This assignment is critical because it defines how the outcome of business activities will be measured and displayed in the financial statements.

The classification process also involves a deep understanding of accounting standards and how different types of transactions affect the short- and long-term financial health of the company. For example, the purchase of a fixed asset not only reduces available cash, but also introduces an asset that will depreciate over time, affecting financial statements for future periods. On the other hand, obtaining a loan increases both assets (cash) and liabilities (debt payable). Accuracy at this stage ensures that financial analyzes are reliable, facilitating strategic decision making based on an authentic representation of the company’s performance and financial position.

Registration in the Journal and Transfer to the Ledger

Journalizing is a meticulous step where each transaction is itemized and entered using the double entry method. This essential procedure begins with the coding of each financial event in the journal, where the dates, detailed descriptions, amounts involved, and the accounts affected are specified. Precision here is vital, as each entry must accurately reflect the movement of resources within the company. Debit and credit accounts not only record increases and decreases in values, but also provide a clear narrative of business operations, allowing for consistent tracking of economic flows.

Subsequently, the transactions recorded in the journal are transferred to the general ledger. This step is essential to consolidate accounting information and facilitate the generation of financial reports. In the general ledger, each accounting account collects and sums the debits and credits from multiple transactions, allowing a global and specific view of the economic impact in each category. This process not only organizes accounting information into a more manageable format, but also sets the stage for deeper financial analysis, such as trend detection, performance evaluation, and strategic planning based on historical and current data.

Adjustments and Journal Entries

Adjustments and journal entries are crucial to ensuring that financial statements provide an accurate and up-to-date view of the company’s financial position at the end of an accounting period. These adjustments cover a variety of situations, such as the recognition of accrued income and expenses that have not yet been formally documented, such as accrued interest or expenses for services received but not yet billed. This phase allows us to rectify any temporal discrepancy between accounting recognition and economic reality, ensuring that each element is recorded in the correct period.

Additionally, accounting adjustments are essential to account for changes in the value of assets and liabilities due to market fluctuations or wear and tear. This is evident in the updating of inventory values ​​under the lower of cost or market principle, or in the revaluation of assets and liabilities in foreign currency due to variations in exchange rates. These steps are essential not only to comply with accounting principles such as prudence and consistency, but also to provide investors, creditors and other users of financial statements with reliable information on which to base their economic decisions.

Preparation of Trial Balance

Preparing the trial balance is an essential intermediate step before finalizing the financial statements. It acts as a control review, where all general ledger accounts are added up to confirm that the total sum of debits is equal to the total sum of credits, in accordance with the fundamental principle of double entry. This process not only detects arithmetic or recording errors but also omissions and duplications that could distort the financial representation of the company. By identifying imbalances, accountants can investigate and make necessary corrections, maintaining the integrity and accuracy of accounting information.

This balance sheet also provides a panoramic view of the company’s current financial situation, allowing accountants and management to observe trends and deviations in accounting figures. It serves as a diagnostic tool that, in addition to verifying accuracy, helps to better understand the flow of transactions throughout the period. Thus, any subsequent adjustments are made on a solid and clear basis, paving the way for the generation of reliable and detailed financial statements.

Preparation of Financial Statements

Preparation of financial statements is a crucial phase that synthesizes all accounting information into structured formats to analyze the position and performance of the company. The balance sheet provides a detailed portrait of the company’s assets, liabilities, and equity at a specific point in time, revealing the company’s ability to generate resources and its financial strength. On the other hand, the income statement breaks down income and expenses over a period, providing a clear measure of operational profitability and efficiency in resource management.

Additionally, the statement of cash flows is essential to understand how the company generates and uses cash and cash equivalents in its operating, investing and financing activities. This statement helps managers and investors discern the liquidity and solvency of the company, offering insights into its ability to meet short-term obligations and finance its long-term growth. Together, these statements not only meet financial reporting requirements but also serve as strategic tools for decision-making and future planning.

Closing of the Accounting Period

During the closing of the accounting period, specific procedures are carried out to ensure that all economic activities of the period have been fully recorded and reflected. Income and expense accounts are “closed” by transferring their balances to the accumulated results account within equity, which reflects the final result of the year in terms of profit or loss. This adjustment not only clarifies the financial performance of the period but also resets the income and expense accounts to begin the new cycle without previous balances, maintaining organized and coherent accounting.

This process is vital to maintain orderly accounting and facilitate comparability between periods. At the end of this step, it is checked that all temporary accounts are closed and the permanent accounts are correctly updated, ready to start the new accounting period. This phase also includes the preparation and final review of the financial statements, ensuring that they faithfully reflect the economic situation of the company at the end of the period, ready to be audited or presented to stakeholders.

Conclusion

The accounting cycle is an essential pillar in the financial management of any company. It allows organizations to track, analyze and report their financial operations systematically and accurately. This process not only complies with legal and fiscal requirements, but also provides stakeholders with a reliable basis to make informed decisions. By understanding and effectively managing each stage of the accounting cycle, companies can ensure better financial health and a sustainable future.