Accounting Cycle


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After reading this , you should be able to understand the Accounting Cycle.

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Accounting Cycle

  1. 1. Accountint Cycle by Haider Ali
  2. 2. Accounting Cycle " The Accounting cycle is a process of flow of business transactions. It defines how business transaction move toward the next step unless the desired business financial information are achieved. It is a series of steps which are repeated every reporting period. The process starts with making accounting entries for each transaction and goes through closing the books. Use this tutorial for an overview of the accounting cycle, covering activities required both during and at the end of the accounting period. Now look below to understand how Accounting cycle moves toward the next stage.
  3. 3. Accounting Cycle
  4. 4. <ul><li>While preparing your accounts in manual process, you have to follow the above mentioned cycle step by step, although the best accounting software such as QuickBooks Premier, Peachtree Complete Accounting, and MYOB handle much of the accounting cycle automatically, such as posting to the general ledger, a thorough grasp of these accounting principles gives business leaders valuable information about the composition of financial statements and how to meet financial goals. Understanding of Accounting Cycle is a must thing and students must learn this cycle by heart because once you have got the basic concepts you can understand accounting the more easily. </li></ul>
  5. 5. <ul><li>Now we define each step in detail </li></ul><ul><li>Source Documents . </li></ul><ul><li>A Source Document provides evidence that an economic event has actually occurred. Examples of source documents include a receipt, an invoice, a bill and a bank statement. </li></ul><ul><li>Record Transactions in Journal . </li></ul><ul><li>Once you have received the source document, the next step is to journalize it in a Journal. The Journal is called book of original entry, this means that source documents are reviewed as to the accounts involved. The journal provides a chronological record of transactions that affect the financial statements. An entry into the general journal is called a journal entry. </li></ul>
  6. 6. <ul><ul><ul><li>Post Journal entries into Ledger. </li></ul></ul></ul><ul><ul><li>After journalizing the source document, you need to go ahead by posting journal entries into ledger. In other words, the debit and credit in the journal will be posted into the appropriate debit and credit column of each Ledger page. </li></ul></ul><ul><ul><li>Trail Balance . </li></ul></ul><ul><ul><li>Personally I believe that once you have Journalized business transaction accurately and posted them into the appropriate Ledger accurately, you did a great job. Now what to do next? Obliviously you need to check the accuracy of your Journalizing and Posting process, for this purpose, you need to prepare a Trail Balance. A Trial Balance is simply a listing of the Ledger accounts with their respective Debit or Credit balances. It is not a formal Financial Statement, but a great tool to check the Accounting Equation ( Debits=Credit). </li></ul></ul>
  7. 7. <ul><li>Adjusting Entries </li></ul><ul><li>Excellent! You have prepared Trial Balance Accurately and did the most of you spade work, but the process is not completed here. Being Accountant you feel that Adjusting entries are necessary to go ahead. You need to record and adjust your prepaid expanses, Accrued expanses, unearned income etc. </li></ul><ul><li>Adjusting Entries serve two main purposes in the Accounting Cycle: </li></ul><ul><li>Adjustments are made to properly match revenue earned for the period with expenses incurred for the period to more accurately arrive at net income. </li></ul><ul><li>Adjusting Entries provide for a more accurate measurement of Assets and Liabilities for the period on the Balance Sheet. </li></ul><ul><li>In short, Adjusting Entries provide for a more accurate assessment of the Financial Statements for the period. </li></ul>
  8. 8. <ul><li>Adjusted Trail Balance . </li></ul><ul><li>After making adjustment entries, you need to prepare Adjusted Trail Balance. </li></ul><ul><li>Prepare Financial Statements. </li></ul><ul><li>You did it all what would be the next level? Sure! Preparing Financial Statements. Owners of the business entity require their business’s financial status, so they need to know how much they have earned or lost, how much is receivable and how much is payable, the valuation of closing stock etc. Four types of Financial Statements are prepared but commonly most of small businesses require “Income Statement / Profit & Loss A/C” and Balance Sheet. Other two statements are “Cash Flow statement and Retained Earning A/C. </li></ul>
  9. 9. <ul><li>Income Statement / Profit & Loss </li></ul><ul><li>Income financial statements present information concerning the revenue earned or loss suffered by a company in a specified time period, normally annually. The income statement is created from the nominal or temporary accounts. </li></ul><ul><li>Balance Sheet </li></ul><ul><li>The balance sheet is created from the real or permanent accounts. Real accounts are the assets, liabilities, and owner's equity. Balance Sheet provides insight into a company’s assets and Liabilities at a particular point in time. Information about the company’s shareholder equity is included as well. </li></ul>