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The accounting cycle is started and completed within an accounting period. Accounting periods vary but the most common is that of the annual period which can be either a calendar year beginning on January 1st and ending on December 31st or a fiscal year which sets the beginning of the accounting period to any date. So, a fiscal year that begins on 1st April would end 31st March of the following year. It is however not obligatory to use a calendar year.

The accounting cycle focuses on historical events and ensures transactions are reported correctly to provide information for external users. This is different to the budget cycle as that relates to future operating performance and planning for future transactions and is used for internal management purposes.

A typical property management and financial accounting system will provide the following:

  1. Nominal (or general ledger) Sales Ledger (Accounts Receivable) and Purchase ledgers (Accounts Receivable);
  2. Arrears and Collection;
  3. Trial Balance;
  4. Balance Sheet;
  5. Profit and Loss;
  6. Traditional client statements at year end.

Beginning the Cycle

The accounting cycle begins with all business transactions being recorded as entries in a journal which is a chronological record built in the date order in which the transactions occur along with:

  1. A short description,
  2. Debit amount
  3. Credit amount
  4. A reference number.

These journal entries are then posted (transferrered) into the nominal ledger (also known as a general ledger) which records transactions that are debited and credited on a constant basis. This is known as ‘double-entry’ book-keeping and it requires that there must always be at least one offsetting debit and credit for all entries made into the nominal ledger. A debit (DR) is usually either an Asset,which is a balance in favour of the company, and a credit [CR] whichis something that the company owes.

Some debit and credit examples can be found here.

Accounting software often refers to the nominal ledger as the Chart of Accounts where the journal entries are sorted into individual sub-ledger accounts, and assigned an account type denoted by the number range in which the account sits. In turn they represent the sequence on financial statements:

  1. Fixed Assets
  2. Current Assets
  3. Current Liabilities
  4. Long Term Liabilities
  5. Capital and Reserve;
  6. Sales
  7. Purchases
  8. Direct Expenses
  9. Overheads
  10. Depreciation and Sundry
  11. Suspense Accounts: This is a general ledger account where transactions are temporarily recorded as sometimes it is not clear what it is for. So, until it becomes clear, it can be placed here for the time being.

During the accounting process, each of these debits and credits end up in either the Balance Sheet or the Profit and Loss Account.

THE TRIAL BALANCE

The Trial Balance is an internal report compiled from the accounting records and it’s purpose is to provide a quick check that for every debit entry made, an equal credit has also been made. Each debit and credit should include the same date and identifying code so in case of error, it can be traced back to a journal and transaction source document.

When the trial balance is first run, it is called the unadjusted trial balance and each line only contains the ending balance. Usually the accounting software will automatically block all accounts that have a zero balance from appearing. The format of the initial trial balance report contains the following columns:

  1. Account number;
  2. Account name;
  3. Ending debit balance (if any);
  4. Ending credit balance (if any).

If the journals are error-free and posted properly (in other words double entry has been maintained throughout) then the total of the trial balance should be equal but what what it won’t do is identify a) where errors have been made and b) what those errore are.

If they don’t balance then it could be because there are:

  1. Mistakes in transferring the balances to the trial balance;
  2. Errors in balancing an account;
  3. Wrong amounts posted in the ledger;
  4. Entries made in the wrong column, i.e. debit instead of credit or vice versa;
  5. Reversals of opening balances;
  6. Timing differences for accruals and pre-payments;
  7. Additional invoices for late payments;
  8. Postings that have been omitted.

Adjusted Trial Balance

An adjusted trial balance is the last step of the accounting cycle. It’s purpose is to confirm that the total of the debits and credit balances in all the accounts are equal before they are used to prepare the financial statements, specifically the income statement and balance sheet. One of the most common adjustments are those of the timing differences for accruals and pre-payments.

Accruals are costs incurred during the year to date, but haven’t yet been billed. The method uses the ‘matching principle’ which is the date the transaction actually occurs rather than when payment is made or received. It is recorded as an ‘account payable’ under the current liabilities section of the balance sheet, and also as an expense in the income statement.

Prepayments are costs included in the figures which relate to the next few months. So, if a quarterly bill is paid in advance there will be a deduction from the expenditure. Generally, the amount of prepaid expenses that will be used up within one year are reported on a company’s balance sheet as a current asset. As the amount expires, the current asset is reduced and the amount of the reduction is reported as an expense on the income statement.

YEAR -END SERVICE CHARGE STATEMENT

Whilst current legislation does not state how soon the annual statement of accounts for service charges should be produced and issued to leaseholders, all leaseholders paying variable service charges should receive it within six months of the end of the following accounting year. If the lease contains a date on which they should be issued that must be adhered to or there could simply be a statement requiring them to be produced ‘as soon as practical’.

The objective of the year end accounts is to ensure that:

  1. The Financial Statements prepared after the year end procedures contain the information that is true and fair;
  2. Any errors are detected;
  3. Fraud is prevented;
  4. All the items of income and expenditure are recorded on accrual basis;
  5. The ledger balances that are transferred from one financial year to another are accurate.

A breakdown of the year-end service charge statement can be found here.

 

 

 

 

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