Accounting Cycle: When complete sequence of accounting procedure is done which happens frequently and repeated in same directions during an accounting period, the same is called an accounting cycle. Accounting cycle starts from the recording of individual transactions and ends on the preparation of financial statements and closing entries. The accounting cycle is the name given to the collective process of recording and processing the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements.
Accounting cycle or accounting process includes the following:
- Identifying the transactions from source documents like purchase orders, loan agreements, invoices, etc.
- Recording the transactions in the journal proper and other subsidiary books as and when they take place.
- Classifying all entries posted in the journal or subsidiary books and posting them to the appropriate ledger accounts.
- Summarizing all the ledger balances and preparing the trial balance and final accounts with a view to ascertaining the profit or loss made during a particular period and ascertaining the financial position of the business on that particular date.
Steps/Phases of Accounting Cycle
The steps or phases of accounting cycle can be developed as under:
- (i) Recording of Transaction: As soon as a transaction happens it is at first recorded in subsidiary book.
- (ii) Journal: The transactions are recorded in Journal chronologically.
- (iii) Ledger: All journals are posted into ledger chronologically and in a classified manner.
- (iv) Trial Balance: After taking all the ledger account closing balances, a Trial Balance is prepared at the end of the period for the preparations of financial statements.
- (v) Adjustment Entries: All the adjustments entries are to be recorded properly and adjusted accordingly before preparing financial statements.
- (vi) Adjusted Trial Balance: An adjusted Trail Balance may also be prepared.
- (vii) Closing Entries: All the nominal accounts are to be closed by the transferring to Trading Account and Profit and Loss Account.
- (viii) Financial Statements: Financial statement can now be easily prepared which will exhibit the true financial position and operating results.