Accounting cycle is the process which is used to complete the accounting process of the company. The length of an accounting cycle can be varied organization to organization and it can be monthly, quarterly, half yearly or annually. The Accountants have to strictly maintain this cycle from beginning to end.
Definition of Accounting Cycle
Accounting Cycle is the process that identifies, analyze and records the accounting events of the company. The Process starts with the transactions take place and ended when the financial statement is prepared.
Accounting Cycle ensures that the financial statements give accurate financial pictures of the company. A company can maintain manual accounting process as well as computerized accounting process. Computerized Accounting process gives a more accurate result and it is less time-consuming. Many organizations using a fully computerized accounting system for accurate accounting results.
Steps of Accounting Cycle
There is nine steps of Accounting which are mentioned are as follows:
- Data collection and analyzing the transactions
- Making Journal Entries
- Posting to the General Ledger
- Un-adjusted Trial Balance Preparation
- Posting of Adjusting Entries
- Adjusted Trial Balance Preparation
- Financial Statement preparation
- Closing the Books of Accounts at the year-end
- Post Closing Trial Balance
The Accounting cycle (Process) are presented in the following table:
|1. Data Collection and Analyzing the Transactions
|At this stage, as an accountant, you will collect relevant data and examine the source documents to analyze the transactions. Source documents represent the accounting documents which may include cash, bank, sales, and purchase related documents. This is a continuous process throughout the accounting period.
|2. Making Journal Entries
|After analyzing and verifying the documents, you will make a journal entry to record the transaction. Actually, this is where the accounting cycle begins and the transaction is formally documented. You will pass double entry for every transaction using a double entry system. In double entry system Debit and credit always will be equal. This process will be repeated throughout the accounting period.
|3. Posting to the General Ledger
|You made journal entry already. This is the step where you will transfer the journal entry to the relevant head. What’s your responsibility at this stage? You will open two head as you mentioned in the journal voucher. Now simply transfer that transaction to the respective head. This is also a continuous process of the whole accounting period.
|4. Preparation of Un-adjusted Trial Balance
|Now you will prepare an unadjusted trial balance. But why this is unadjusted? Because we are using the accrual basis of accounting for revenue recognition, expenses, assets, and liabilities where some items to be incurred after a later period.
However, you will prepare unadjusted Trial Balance simply taking the ledger balance. Actually, the trial balance is the summary of ledger balances irrespective of whether to carry the debit balance or credit balance.
Trial Balance of the company to be prepared at the end of the accounting period.
|5. Posting of Adjusting Entries
| Adjusting entries are prepared at the end of the accounting period and before preparation of Financial statements of the company.
There are five types of adjusting entries, such as :
– Adjust Prepaid Assets
– Adjust Unearned Revenue Account
– Adjust Plant and Equipment Assets
– Adjust Accrued Revenue; and
– Adjust Accrued Expenses
Since Accrual basis of accounting is using to record the sales, expenses, assets, and liabilities, adjusting entries is required to make a correct account. Adjusting entries are making through passing journal entries. Adjusting entries passes at the end of the accounting period.
|6. Adjusted Trial Balance Preparation
|At this stage, your duty is to prepare the Adjusted Trial Balance to prepare the financial statement of the company. With unadjusted Trial Balance, you will adjust (add/less) the adjusting entries.
7. Financial Statement preparation
|Financial Statement comprises as Income Statement, Cash flow statement, Fund Flow Statement, Notes to the accounts and Balance sheet of the company. From the adjusted trial balance the financial statement is prepared. Financial Statement shows the financial position and financial performance of the company.
|8. Closing the Books of Accounts
|Revenue and Expenditure accounts to be transferred to the Trading and Profit & Loss Account. The balance of revenue and expenditure comes to the “NIL” at the year-end. Retained earnings are transferred to the owner’s equity or capital account.
|9. Post Closing Trial Balance
|The post-closing trial balance is the balances of assets, liabilities and capital account. These balances are transferred to the next financial year as an opening balance.