Page 2Accounting CycleThe Accounting cycle is a process of flowof business transactions. It defines howbusiness transaction move toward thenext step unless the desired businessfinancial information are achieved. It is aseries of steps which are repeated everyreporting period. The process starts withmaking accounting entries for eachtransaction and goes through closing thebooks. Now look below to understand howAccounting cycle moves toward the nextstage.
Page 4• While preparing your accounts in manualprocess, you have to follow the abovementioned cycle step by step, althoughthe best accounting software such asQuickBooks Premier, Peachtree CompleteAccounting, and MYOB handle much ofthe accounting cycle automatically, suchas posting to the general ledger, preparinga Trail Balance and producing FinancialStatements. Understanding of AccountingCycle is a must thing and students mustlearn this cycle by heart because once youhave got the basic concepts you canunderstand accounting the more easily.
Page 5Now we define each step in detail• Source Documents.A Source Document refers and includes any documentthat is received or issued against any businesstransaction, which is needed to be recorded in aJournal. It provides evidence that an economic eventhas actually occurred. Examples of source documentsinclude a receipt, an invoice, a bill , a payment and abank statement etc. A source document is necessaryto make journal entry because if there is no sourcedocument, there would be not journal entry.
Page 6Record Transactions in Journal.•Once you have received thesource document, the next step isto analyze and record this sourcedocument in Journal. The Journalis called book of original entry,because as soon as businesstransaction originates it isrecorded in journal . The journalprovides a chronological record oftransactions that affect thefinancial statements. An entry intothe journal is called a journalentry.
Page 7Post Journal entries into LedgerAfter journalizing the source document, youneed to go ahead by posting journal entriesinto ledger. In other words, the debit andcredit in the journal will be posted into theappropriate debit and credit column of eachLedger account.The Ledger is called the king of all books ofaccounts because all entries from the booksof original entry must be posted to thevarious accounts in the ledger. It should benoted that journal contains a chronologicalrecord while ledger containsa classified record of all transactions.
Page 8Trail Balance.Personally I believe that once you have Journalizedbusiness transaction accurately and posted them intothe appropriate Ledger accurately, you did a great job.Now what to do next? Obliviously you need to checkthe 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 Ledgeraccounts with their respective Debit or Creditbalances. It is not a formal Financial Statement, but agreat tool to check the Accounting Equation(Debits=Credit).Preparing Trial Balance
Page 9You did it all what would be the next level?Sure! Preparing Financial Statements.Owners of the business entity require theirbusiness’s financial status, so they needto know how much they have earned orlost, how much is receivable and howmuch is payable, the valuation of closingstock etc. Four types of FinancialStatements are prepared but commonlymost of small businesses require “IncomeStatement / Profit & Loss A/C” and BalanceSheet. Other two statements are “CashFlow statement and Retained Earning A/C.Prepare Financial Statements
Page 10• Income Statement / Profit & Loss• Income financial statements present information concerningthe revenue earned or loss suffered by a company in aspecified time period, normally annually. The income statementis created from the nominal or temporary accounts.• Balance Sheet• The balance sheet is created from the real or permanentaccounts. Real accounts are the assets, liabilities, and ownersequity. Balance Sheet provides insight into a company’s assetsand Liabilities at a particular period of time. Information aboutthe company’s shareholder equity is included as well.