Accounting is the process of identifying, summarizing, measuring, recording and interpreting economic transactions. Accounting is called the language of business. Accounting cycle is in the head of an accounting process. This is the system of transforming raw data into financial statements in order to enable users to make a full assessment of company’s performance.
There are several main steps of accounting cycle in typical economic system. Among them analyzing, journalizing, posting, preparation of the trial balance and of the financial statements.
The accounting cycle begins from analyzing of source of documents (such as invoices, sale slips, receipts etc.) which shows the monetary value of transactions. The key goal of this step is to identify the accounts on which that documents have influence and what is the level of impact. Then all the transactions must be recorded in the company’s general or specialized journal. After that all registered information is posted into general ledger which has separate sections or sheets for every account.
The next step is summarizing the balances of all the accounts in general ledger into the trial balance. This document is very important because it shows if the credit balances of accounts are equal to the debit ones at the end of the accounting period.
One of the key steps in an accounting cycle is adjusting entries. At this stage all the errors made earlier are corrected (for example posting a sum into the wrong account etc.). And expenses which have been incurred but not written in the journal are recorded.
The final financial statements which are prepared on the next step of accounting cycle shows all company’s assets, liabilities, owners’ equity or firm’s revenue and expenses at particular time.
The last stage is closing journal entries. Its main purpose is closing of temporary accounts into incomes, loss or capital. It helps to clear account balances and prepare them for the next accounting period.
All in all, understanding the accounting cycle is the background of developing career in finance.
References
Accountingtools.com,. (2016). What are the steps in the accounting process? - Questions & Answers - AccountingTools. Retrieved 20 January 2016, from http://www.accountingtools.com/questions-and-answers/what-are-the-steps-in-the-accounting-process.html
Netmba.com,. (2016). Accounting Cycle. Retrieved 20 January 2016, from http://www.netmba.com/accounting/fin/process/
Accountingverse.com,. (2016). The Accounting Cycle / Accounting Process - AccountingVerse. Retrieved 20 January 2016, from http://www.accountingverse.com/accounting-basics/accounting-cycle.html
