An accounting cycle is defined as a process of identifying, collecting and analyzing financial transactions. The process of accounting cycle ends with the analysis of financial statements which includes income statement, balance sheet and cash flow. The process of accounting cycle is repeated during each reporting period.
The entries are first posted to a journal and then posted to respective accounts. With the advent of accounting software, a lot of posting has been reduced and the double entries are managed by the software. The accuracy of the software reduces efforts of an accountant.
The various steps of an accounting cycle are discussed hereunder. The basic steps of accounting are analyzing the transactions, recording them in a journal, posting the entries into the ledger, adjusting the balance and passing adjusting entries, preparing financial statements and finally closing the accounts. Analysis of accounting transactions and posting them into the ledger happens throughout the accounting period. They are continuously recorded and analyzed as each event occurs. Transactions can be analyzed using source documents which are either in the hard copy or in an electronic mode. Some examples of the same are sales orders, purchase orders and bank statements. After analyzing the transactions from the source documents, the company records them in a journal in the respective accounts. Two entries are passed in the accounts, one debit and another one credit. Accounting transactions have a double effect on the financial statements. Hence each transaction has to be recorded in at least two accounts. After passing the entries in respective accounts, the transactions are recorded in the journal ledger which will consist of all the transactions during the period.
The next step is transfer of information from the journal to the ledger which is an extremely simple process. The ledger will hold record of all the accounts and shows the details about each company account. Further, a trial balance is prepared which is yet unadjusted. It will consist of all accounts and its respective balances at a particular point of time. Adjusting entries are then passed which helps prepare an adjusted trial balance. Adjusting entries are recorded in a journal and then posted into the ledger. The entries are passed to bring a balance in the revenue and expense account thus adjusting the assets or liability account balance.
Thus an adjusted trial balance is prepared which is used for the preparation of final accounts. This consists of income statement, balance sheet and cash flow. The account balances of trial balance are transferred to the income statement and balance sheet. This helps in the determination of retained earnings. Closing entries are finally passed in the journal which closes the accounts for the period and the balance is transferred to the balance sheet.
Some companies carry out the steps simultaneously while some take it one at a time. The accounting cycle is followed by all the organizations. Only then it becomes possible to prepare the financial statements which give out all the information of the organization. The steps are repeated in each period. The accountant is required to have adequate knowledge of recording and analyzing the financial statements. The whole process may seem too long but it is necessary and not too time consuming. The steps can be carried out simultaneously and with regular maintenance of accounts it becomes easier to prepare the trial balance and the final statements.
References
Accounting Cycle. (n.d.). Retrieved from Business Dictionary: http://www.businessdictionary.com/definition/accounting-cycle.html
Averkemp, H. (n.d.). What is the accounting cycle? Retrieved from Accounting Coach: http://www.accountingcoach.com/blog/accounting-cycle
Steps to the accounting cycle. (n.d.). Austin, 1-3.
