Accounting cycle
Accounting
cycle is the sequence of steps involved in the accounting process. Accounting
cycle starts with the identification and recording of financial transactions of
an organisation and ends with the preparation of final accounts for the
accounting year. The cycle continues for the next accounting year with the
opening balances of assets and liabilities which are the closing balances of
the preceding year. The steps involved are:
The first
step in the accounting process is identifying the financial transactions of a
business. All the monetary transactions are recorded in the books of original
entry called journals. Recording the transactions in the journal is called
journalising. Entries are made in the journals on the basis of source documents
in the chronological order, i.e., the order of occurrence of the transactions.
Transferring
the entries from the journal to the ledger is called posting. In the ledger,
entries are made in each account after classifying them under common heads.
Finding the differencebetween the total of the debit column and credit column
of all the ledger accounts is called balancing.
The list of
ledger balances namely trial balance is prepared as the next step. On the basis
of ledger balances the financial statements are prepared.
Next step is
preparation of trading account for a particular accounting period. All the
direct revenues and direct expenses are transferred to trading account. The
balance in the trading account is the gross profit or gross loss.
Profit and
loss account is prepared next for a particular accounting period. All the
indirect revenues and indirect expenses along with gross profit or gross loss
are transferred to profit and loss account. The balance in the profit and loss
account is the net profit or net loss.
A statement
showing the balances of assets and liabilities namely balance sheet is prepared
as the final step in the accounting process. It is prepared on a particular
date, normally, on the last day of the accounting period.
The closing
balances of an accounting year are taken as the opening balances for the next
accounting year. The transactions identified and recorded for the next year are
followed by posting and other steps.
The results
are communicated to the users of accounting information for the purpose of
analysis and decision making.
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