The 8 Important Steps in Accounting Cycle
Accounting cycle is the complete sequence of Accounting procedure beginning from identifying and recording the transaction till the preparation of final accounts. Usually, there are eight steps in accounting cycle processes starting from identifying the transaction to closing the books of accounts. One of the main duties of a bookkeeper is to track of the full accounting cycle from the start to finish.
1. Identifying the Transaction
Separation of different transactions that occur in day-to-day basis. The transaction related to company are only identified. The source documents to identify business transactions are receipts, Vouchers, bills etc. Once you identify the transaction, decide which account they fall under.
2. Recording the transactions in journal book
The next step is to record these entries in the company’s journal in chronological order. If a company is using double entry system of book keeping, there should be 2 entries for each transaction. There should be one debit and credit for each transaction. The debit and credit should be equal and for every debit there should be equal credit.
Ex: The transaction identified is “Sale of goods for cash Rs.5000”
This has to be entered in Journal book.
And the Journal entry is:
| Journal Entries in the books of XYZ Co. | ||||
|---|---|---|---|---|
| Date | Particulars | L.f | Debit (Rs.) | Credit (Rs.) |
| 01-01-2020 | Cash a/c Dr To Sales a/c (Being goods sold for cash) | 5000 | 5000 | |
3. Posting to the General Ledger (GL)
The journal entries are then posted to the general ledger where a summary of all transactions to individual accounts can be seen. It provides the summary and balance of each account. It helps to prepare trial balance and final accounts.
4. Unadjusted Trial Balance
Trial balance may be defined as a statement which contains balances of all ledger account’s on a particular date. Unadjusted Trial Balance is the first list of ledger account balances, compiled without making any period end adjustments. Unadjusted Trial Balance is prepared before adjusting few revenues and expenses which has occurred at the end of the period.
5. Adjusted entries
The revenue recognition principle determines that revenues and expenses must be recorded in the period when they are actually incurred.
However, in practice, revenues might be earned in one period, and the corresponding costs are expensed in another period. Also, cash might not be paid or earned in the same period as the expenses or incomes are incurred. To deal with the mismatches adjusting entries are made at the end of an accounting period after an Unadjusted trial balance is prepared to adjust the revenues and expenses for the period in which they occurred.
6. Trial Balance
An adjusted trial balance is a trial balance that is prepared after incorporating period-end adjusting journal entries in an unadjusted trial balance. Adjusting trial balance include adjustments made by accountants of the organisation as well as by the auditors at the time of finalization of accounts.
7. Financial Statement
Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. They depict not only profits and losses, but also assets and liabilities.
Financial statement includes :
- Balance Sheet
- Income statement
- Cash flow statement
- Statement of shareholder’s equity
8. Closure of books
The final step in the accounting cycle is to close the accounting books. Closing your books wraps up financial activities for the period. The revenues and expense accounts are zeroed out for the next accounting cycle because revenue and expense accounts are income statement accounts which show performance for a specific period.
