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- Definition of Accounting Cycle
- The Steps of Accounting Cycle
- Accounting Cycle Explanation
Before understanding accounting well, we need to understand its process and procedure first, right?
The
understanding accounting cycle is the very beginning part of
understanding accounting. Because it narrates what you need to
understand or know well. On the other hand, It also narrates the functions of accounting.
From this article, we will know what is accounting cycle and the steps of the accounting cycle.
Definition of the Accounting
Cycle:
It is said in the going concern concept of accounting that every
organization will run for an indefinite period. But to supply
information to related accounting information users we need to prepare a
financial statement.
In order to prepare a financial statement, we have to follow some steps such as identification of transaction, recording, classification, etc, and all of these tasks are needed to complete step by step.
So, the accounting cycle consists of the all steps which start from the identification of transactions and after preparing the balance sheet end at closing entries(closing journal entry).
All of
those tasks are completed one after another. That's why it is called an
accounting cycle.
However, the steps of the accounting cycle are narrated below...
1.
Identification of Transaction:
We know that every transaction is an
event. But every event is not a transaction. Identification of
transactions is the first step of the accounting cycle. In this step, an
accountant identifies transactions from all the events that occurred in
a specific period.
If any event affects the accounting equation then it is identified as a transaction. Then it is select to record in the account book.
2. Recording in the Journal Book:
After
identification of transactions, they are needed to write down in the
journal book. Journal book is called the daily book of account.
Keeping a journal book is a necessary step of the accounting cycle. In other words, it is the cornerstone of the accounting cycle.
3.
Classification:
From the journal book we can't know about the amount of a
specific cost or earning for the whole accounting period. That's why to
know the balance of every account, all transactions of an account bring
together in a particular table and finalize the total balance for the
period. It is called a ledger book.
By ledger book, we can know the whole amount of all the activities of an account. Preparing the ledger book is an important step of the accounting cycle.
4. Trial
Balance:
To justify the mathematical purity of accounts, an accountant
prepares a trial balance. If the debit and credit balance becomes the
same then it is assumed that there is no error in the accounts. But if
they don't match then it is assumed that there is a wrong existed in the
accounts.
The accounting equation is proved in the trial balance. Although it is a step of the accounting cycle, preparing a trial balance is not mandatory. But if it is prepared then it is well. Because it ensures the mathematical correctness of accounts.
5. Adjusting
Entries:
Adjusting entries are the journal entries that are recorded in
the account book by showing the balance of advance and accrued expenses
and incomes after the accounting period in order to finalize the real
financial condition of a business concern. It is an important step of
the accounting cycle.
6. Adjusted Trial Balance:
After preparing
adjusted entries the next step of the accounting cycle is preparing an
adjusted trial balance. An adjusted trial balance is prepared after
preparing ledger accounts by the adjusting entries. It shows the
mathematical correctness of adjusting entries.
7. Preparing
Worksheet:
Financial statements are prepared from the adjusted trial
balance. But if a statement shows trial balance, adjusted trial balance,
income statement, and balance sheet, then it is called a worksheet.
Preparing a worksheet is not mandatory. In other words, in the accounting cycle, it is not a mandatory step.
8.
Financial Statement:
Financial statements are the most important step
of a business organization. In other words, it is the most important
step of the accounting cycle.
Financial statements are divided into two parts, one is the income statement and another is the balance sheet.
By the income statement, the users of the account can know the income and expense of the business concern for the whole year or accounting period and they can know also whether the business has made a profit or loss.
By the balance sheet, the users of the account can know the whole scenario of the business organization. It shows also the current and fixed assets of the business.
9. Closing Entries:
In this step of the
accounting cycle, all the income is shown in the debit and the income
statement is shown in the credit. On the other hand, All the expenses
are shown in the credit and the income statement is shown in the debit.
10.
Post Closing Trial Balance:
After the closing entries posting in the
journal book and preparing the ledger account by those closing entries, a
post-closing trial balance is prepared.
11. Contra Entries:
The
final step of the accounting cycle is posting the contra entries in the
journal book. In this step of the accounting cycle, the previous year's
expense and income are adjusted to the new year's expense and income.
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| Most Important Steps of the Accounting Cycle |
Above we have discussed the steps of the accounting cycle. By the above process, the accounting cycle keeps continuously running year after year. Thus the concept of going concern and the concept of an accounting period become realistic.
