Accounting Cycle Meaning and Functions

1. ANSAL.P
Asst. Professor
Dept. of Commerce and Management
Yenepoya (Deemed to be University)
Session 2
Accounting Cycle

2. Identify and Analyze Transactions
In this initial step, financial transactions are identified and analyzed. Transactions can include sales, purchases,
expenses, and any other financial activities. These transactions are often recorded in source documents like
invoices, receipts, and contracts.
Recording Transactions:
Once transactions are identified and analyzed, they are recorded in a systematic manner. This involves
creating journal entries, which document the date, accounts involved, and the amounts of each transaction.
These journal entries serve as a detailed record of all financial activities.
Posting to General Ledger:
Journal entries are then posted to the general ledger. The general ledger is a comprehensive record of
all accounts used by the company, including assets, liabilities, equity, revenues, and expenses. Posting journal
entries to the general ledger keeps the accounts up to date

3. Trial Balance: After posting entries to the general ledger, a trial balance is
prepared. The trial balance is a list of all the accounts with their respective debit
and credit balances. It's used to ensure that the accounting equation (Assets =
Liabilities + Equity) is in balance.
Adjusting Entries: Adjusting entries are made at the end of an accounting period
(e.g., monthly, quarterly, or annually) to account for items such as accrued
expenses, unearned revenue, depreciation, and other adjustments. These
entries ensure that the financial statements reflect the company's true financial
position.
Adjusted Trial Balance: After adjusting entries, an adjusted trial balance is
prepared. This trial balance is used to create the financial statements, and it
reflects all the adjustments made.

4. Financial Statements: Based on the adjusted trial balance, financial statements are
prepared. The primary financial statements include the income statement (showing
revenues and expenses), the balance sheet (showing assets, liabilities, and equity),
and the cash flow statement (showing the cash flow from operating, investing, and
financing activities).
Closing Entries: At the end of the accounting period, closing entries are made to
transfer the balances of temporary accounts (revenue and expense accounts) to
the retained earnings account. This resets the temporary accounts to zero and
prepares them for the next accounting period.
Post-Closing Trial Balance: After closing entries, a post-closing trial balance is
prepared to ensure that the only accounts with balances are permanent accounts
(i.e., assets, liabilities, and equity).

5. Reversing Entries (optional): Some businesses use reversing
entries at the beginning of a new accounting period to simplify
the recording of certain transactions, such as accruals and
prepayments.
Start a New Cycle: The accounting cycle is an ongoing process,
and it begins again for the next accounting period. The balances
from the post-closing trial balance become the opening
balances for the new period.

6. Thank You
ANSAL.P
Asst. Professor
Dept.of Commerce and Management
Yenepoya (Deemed to be University)