Your Guide to the Accounting Cycle in Hong Kong
Before we dive into the nuts and bolts of the accounting cycle in Hong Kong, let us learn what an accounting cycle is and what processes come under it.
Any company, whether small or large, must record and present its financial statements in a defined period. Similarly, there is a well-established series of steps that define the accounting cycle for most of the companies in the world. The major advantages of following this cycle are:
- The accounting department is likely to contain multiple members. When all the accountants follow the same cycle, there is consistent practice.
- We can closely monitor all the transactions that occur in the company. There is proper documentation of the date and time, amount, and individual or department involved in the transaction.
- The company might have to keep track of multiple accounts that need to be simultaneously updated. Proper practice of the accounting cycle ensures accuracy in this matter.
- Companies must present their financial statements to shareholders and investors every year. The accounting cycle ensures proper organization and presentation of relevant information in the statements.
- The accounting cycle also eases the process of prediction and future planning. Similarly, it facilitates decision making in case of emergencies and crisis.
The accounting cycle in Hong Kong is similar to the one adopted in many other countries in the world. The major steps involved in the cycle are described below.
Step 1: Identification of Transactions
The very first step of the accounting cycle in Hong Kong is the identification of transactions. A company has to carry out a number of transactions on a daily basis. Identifying these transactions and their nature is crucial for maintaining their proper record. Accountants must keep a close eye on every transaction and make sure to track every penny.
Step 2: Recording of Transactions
This is the second step of the accounting cycle in Hong Kong. Records are stored as journal entries in a proper sub-ledger. Likewise, the choice of accounting principle also determines the types of transactions that you will record. In the case of accrual accounting, you record the revenues and expenses at the time of sale. You do not need to send or receive the cash for the transaction. However, in the case of cash accounting, you must record payments or receivables only when the cash comes in or goes out. Similarly, there are two types of recording practices: single-entry and double-entry. In the case of single-entry, you record each transaction once as the amount of incoming or outgoing cash. In double-entry bookkeeping, you record each transaction in at least two accounts as debit or credit.
Step 3: Posting on the General Ledger
Preparing the unadjusted trial balance is the third step in the accounting cycle in Hong Kong. After you record a transaction as a journal entry, you should post it to an account on the general ledger. The general ledger is the primary record that keeps a summary of all accounting activities. Similarly, fixed assets, current assets, liabilities, revenues and expenses, and profits and losses are the major accounts that go into the general ledger. For large companies, the accounting team manages the entries to the general ledger. However, for small businesses, owners themselves or freelancers manage entries and ask for an accountant whenever necessary.
Step 4: Preparing the Unadjusted Trial Balance
Preparing the unadjusted trial balance is the fourth step in the accounting cycle in Hong Kong. The unadjusted trial balance contains the list of all the general ledger account balances during the end of an accounting period. Similarly, this process is also necessary to identify and make necessary adjustments before preparing the financial statements. The unadjusted trial balance is prepared using spreadsheet software which is a more common and convenient method over paper sheets. Likewise, it consists of three main columns: the account name, debit balances, and credit balances. While listing, the assets are normally entered first in the debit section. Second, the liabilities and the stockholder’s equity are listed in the credit section. Then, you must enter the revenues inside the credit section, followed by expenses in the debit section.
Step 5: Recording of Adjusting Entries
Recording of adjusting entries is the fifth step in the accounting cycle in Hong Kong. This is especially important when you are making sure that your accounts follow the revenue recognition and matching principles. Typically, you should create a worksheet, list all the debits and credits, and make necessary adjustments to maintain a balance.
Step 6: Preparation of the Adjusted Trial Balance
Preparation of the adjusted trial balance is the sixth step in the accounting cycle in Hong Kong. The adjusted trial balance is created after making all the necessary adjustments, as mentioned in step 5. The bookkeeper is responsible for carrying out the preparation of adjusting entries.
Step 7: Preparation of Financial Statements
This is one of the major steps in the accounting cycle in Hong Kong. Typically, the financial statements consist of the income statement, the description of the cash flow, and the balance sheet.
First, the balance sheet is the representation of the financial performance and position of the company at that particular reporting period. Likewise, it contains a description of the assets and liabilities of the company.
Second, the cash flow statement defines the amount of cash that goes in and out of the company. Proper management of cash flow is a very crucial part of the business. A company with very high reported profit can quickly go bankrupt if it’s cash management is reckless. Investors need to understand how the company is generating cash, the reserve amount, and how it is paying for its debts and daily operations.
Lastly, the income statement, also known as the profit and loss statement, describes the revenues and expenses of the company. Likewise, it also contains information about profits and losses. With the help of the income statement, one can assess the efficiency of operations and management.
Step 8: Closing of the Books
Closing the books with some financial adjustments is the last step in the accounting cycle in Hong Kong. The credit balances must equal the debit balances at the end of the reporting period. You must complete this step before the end of the closing day. Then, a new accounting cycle starts for the next reporting period.
From this blog, we have understood the entire steps that make up the accounting cycle in Hong Kong. Similarly, we have also learned some of the most important things to keep in mind during each step.
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