Scribd
Upload
192 views4 pages

What Is The Accounting Cycle?

The accounting cycle is a series of steps that businesses use to identify, record, and summarize their financial transactions and generate useful financial statements. It involves collecting transaction data, journalizing entries, posting to ledger accounts, preparing an unadjusted trial balance, making adjusting entries, preparing an adjusted trial balance, generating financial statements like the income statement, balance sheet, and cash flow statement, closing books for the period, and creating a post-closing trial balance. The goal is to transform financial data into useful reports for investors and other stakeholders.

Uploaded by

GOT ML
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
192 views4 pages

What Is The Accounting Cycle?

The accounting cycle is a series of steps that businesses use to identify, record, and summarize their financial transactions and generate useful financial statements. It involves collecting transaction data, journalizing entries, posting to ledger accounts, preparing an unadjusted trial balance, making adjusting entries, preparing an adjusted trial balance, generating financial statements like the income statement, balance sheet, and cash flow statement, closing books for the period, and creating a post-closing trial balance. The goal is to transform financial data into useful reports for investors and other stakeholders.

Uploaded by

GOT ML
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

Accounting Cycle

What is the Accounting Cycle?


Accounting Cycle is a process of identifying, collecting and summarizing
financial transactions of the business with the objective of generating
useful information in the form of three financial statements namely
Income Statement, Balance Sheet and Cash Flows.  It starts with an
accounting transaction and ends when the books of accounts get closed.

1. Collection of data and analysis of transactions

In this first step of the accounting cycle, the accountant of the


company collects the data and analyzes the transactions.
For a smoothly running business, there would be many, many
transactions. The accountant needs to look at each transaction, find
out why it occurred, put it under the right accounts, and then analyze
it.
This step is the most critical of all because this kick-starts the process
of accounting.

2. Journalizing

After collecting and analyzing the transactions, it’s time to record the
entries into the first books of accounts.
In this step, each transaction transfers to the. Under each entry, a
narration written mentions the reason behind debiting or crediting
one account.
Recording the entries in the journal is essential since if there is any
error at this stage of recording, it will linger on in the next books of
accounts as well.
3. Recording the journals into the Accounting is a series of steps
taken one by one.

After journalizing all the transactions, it’s time for the accountant to
record the entries into the secondary books of accounts.
That means if there are cash and capital, there will be two ‘t-tables’ in
the general ledger, and then the balances of respective accounts will
be transferred.
General ledgers allow the accountant to get the closing balance for
preparing the trial balance in the next step of the accounting cycle.

4. Creating an unadjusted trial balance

As you know that trial balance is the source of all the financial
statements, that’s why trial balance gets special attention.
Closing balances of the general ledger accounts prepare an
unadjusted trial balance.
In this trial balance the debit side records the debit balances, and the
credit side records the credit balances.
Then the debit side is totaled, and the credit side is also totaled.
And then the accountant will see whether both the side have similar
balances or not.

5. Performing adjusting entries

At this juncture, the unadjusted trial balance is ready.


In this step, the adjusting entries are prepared.
The adjusting entries are typically related to accrual adjustments,
periodical depreciation adjustments, or amortization adjustments.
These adjusting entries are required to prepare an adjusted trial
balance.
6. Creating adjusted trial balance

After passing the adjusting entries, it’s time to create a new trial
balance.
This trial balance is called adjusted trial balance since it is prepared
after passing the adjustment entries. This trial balance prepares many
critical financial statements.

7. Creating financial statements from the trial balance

This step of the accounting cycle is the most critical part. As an


investor, you must know how and from where all the financial
statements are coming. From the adjusted trial balance, all the
financial statements are born. Adjusted trial balance prepares four
important financial statements:
– Income statement:The first financial statement that every investor
should look at is the income statement. In the income statement, the
first item is sales, and the cost of sales and other operating expenses
are deducted from the sales to ascertain the operating profit. when
deducted from the operating profit, it computes the Net profit of the
year.
– Balance Sheet:The next financial statement on the list is the balance
sheet. In the balance sheet, we record the assets and liabilities. And we
see whether the balance of assets is in harmony with the balance of
liabilities.
– Shareholder’s Equity Statement: This is the next financial
statement that is prepared. In this and the retained earnings are taken
into account. Retained Earnings are percentage of profit reinvested
into the company.
– Cash flow Statement: Finally, the cash flow statement is prepared.
In the cash flow statement, the accountant needs to find out cash flow
from three kinds of activities u2013 operating activities, financial
activities, and investing activities.
Two ways of preparing cash flow operating activities are u2013 the
direct and indirect cash flow from operations.

8. Closing the books

This step is the penultimate step in the accounting cycle.


Closing the books means that all financial statements are prepared,
and all transactions have been recorded, analyzed, summarised, and
recorded.
After closing the books, a would start, and the accountant would need
to start repeating the above steps once again.

9. Creating a post-closing trial balance

To ensure that the are properly recorded, analyzed, and summarized, a


post-closing trial balance is prepared.
Here all the accounts are taken into account, and then the closing
balances are recorded as per their respective position.
Then the credit side and the debit side are being matched to see
whether everything is in the right order or not.

Conclusion
If an investor can understand these nine steps of the accounting cycle,
it would be clear to her how she should approach the company and its
progress or decline. The knowledge of this cycle will help her decide
whether she should invest in the company or not. And at the same
time, she would get a concrete idea about the financial accounting of
the company.

You might also like