Accounting cycle is a series of steps by which the company initially identify, analyse, records information for every accounting events and convert it to financial statements.
The steps of accounting cycle begins when a financial transaction occur and end when you prepare financial statements. Here are all most all the steps that a company follow in it’s accounting cycle:
- Analyze each business transactions.
- Post Journal entries of financial transactions.
- Post transactions to the respective ledger accounts by using double-entry bookkeeping system.
- Prepare a trial balance of the general ledger.
- Analyse general ledger entries.
- Post adjusting entries for all accrued expenses.
- Post closing entries.
- Prepare trial balance.
- Prepare income statement, balance sheet and statement of cash flows.
Analyse and Post a transaction
In Accounting Cycle process, a transaction with economic impact has been identified in an organization and then transaction recorded in the books of accounts by following double entry bookkeeping system. All transaction with economic impact should be recorded at one place.
Prepare journal entry and Post to the general ledger accounts
Based on the transactions with economic impact, journal entries are passed to the respective 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.