Accounting cycle is a series of steps by which it initially records information and converts it into financial statements. It begins with the occurrence of a transaction and ends with the optional steps of reversing entries.
Accounting Cycle steps are as follows:
In this Accounting Cycle process, a transaction with economic impact has been identified in an organization and then transaction has to be recorded in the books of accounts. All transaction with economic impact should be recorded at one place
Prepare journal entry and Post to the T-accounts in the general ledger
Based on the transaction with economic impact, journal entries are passed to the respective T accounts called general ledgers where similar expenses are recorded at one place to summarize at a later point of time.
Prepare a trial balance
Trial balance in a accounting cycle play a major role as it will serve two purpose;
- It will check the equality of debit and credit balanced of the T Accounts.
- It’s the starting point in preparation of financial statements.
Journal and post adjusting entries
While preparing financial statements from a trial balance, there can be situations where the figures of the account has to be adjusted or certain figures found to be not recorded during audit. The updating processes of these events are called adjusting journal entries. For example: revenue may have earned but not yet recorded or income tax calculated but not paid during the financial year.
Prepare the financial statements
As per the rules and regulation of different countries financial statement has to be prepared from the adjusted trial balance. Financial Statement should consist of followings;
- The income statement
- The Balance Sheet
- Owners equity
- Cash flow statement
So the input of the process is transaction and the output is financial statement.