The last step of the Accounting Cycle is step 5, creating financial reports, including the Balance Sheet and Income Statement.
If you’re interested in a more in depth look, have a look at the accompanying textbook Balancing Act: A Practical Approach to Business Event Based Insights, available for download. Specifically, look at Chapter 5, Accounting.
The process of creating financial reports once the trial balance is created is fairly simple, as each balance on the trial balance goes to a specific location on the financial statements.
For example, the asset section of the trial balance goes to the asset section of the balance sheet; liabilities and equity to the other half of the balance sheet. And revenues and expenses to the income statement.
The reporting process is simple–once the balances have been produced: The magic of a ledger.
The one other (optional) activity is resetting the ledger if the activity to be measured should be reset so that a new activity period can be started.
Doing this means taking all the balances for the income statement, and turning them into journal entries, with the offset (the difference) going to the equity or net worth account.
Once this is done, the income accounts become zero, and the earnings are permanently reflected on the balance sheet. As new activity is recorded, the balances in the income statement account.
Watch the next week episode at Accounting and Bookkeeping Series Review
Watch the prior week episode at Accounting Cycle Step 4: Trial Balance
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