It is especially important for accountants to understand each step involved in an accounting system given that they are the ones who will be preparing the financial records which are subsequently presented in financial statements. Analysts, on the other hand, do not require the same level of details. It is, however, prudent for them to become familiar with the information flow through the accounting system.
Accounting System: Flow of Information
The following illustrates how information flows through an accounting system:
- Journal entries and adjusting entries: Preparation of journal entries is the starting point in the flow of information. Journals are used for recording business transactions in chronological order. A general journal is found in all accounting systems and contains a collection of all business transactions in the accounting system, sorted by date. Special journals are only found in some accounting systems and are used to record specific transactions only. Journal entries reflect the date, the accounts and the amounts affected by a business transaction. Adjusting journal entries are a subset of journal entries which are typically made at the end of an accounting period to record items such as accruals.
- General ledger and T-accounts: A ledger shows all business transactions by account. The general ledger is considered the core of an accounting system and contains all of the same entries which are posted to the general journal. The general ledger is useful for reviewing all of the activities that are related to a single account, whereas T-accounts are usually used to describe or analyze accounting transactions.
- Trial balance and adjusted trial balance: A trial balance lists all the account balances at a specific point in time. It is usually prepared at the end of an accounting period as a first step in producing the financial statements. The initial trial balance helps to identify if any adjusting entries are required. If adjusting entries are made, an adjusted trial balance is then prepared.
- Financial statements: Preparation of the financial statements is the final step in the accounting system and is done using the account totals which result from the adjusted trial balance.
Which of the following provides a list of all the account balances at a particular point in time?
A. General ledger
B. General journal
C. Trial balance
The correct answer is C.
The trial balance lists all the account balances at a specific point in time. The general ledger shows all business transactions by account, while the general journal contains a collection of all business transactions in the accounting system, sorted by date.
Reading 22 LOS 22g:
Describe the flow of information in an accounting system