What is the accounting cycle – Example and Diagram

Accounting Cycle means the life cycle of the business financial transaction in the accounting system.

What is the accounting cycle

The accounting cycle is the step by step process of recording, classifying, and summarising business transactions for the particular financial year.
Nowadays, many accounting software is available in the market for preparing the books of the business. so in this software, almost all steps of the accounting cycle are automated. You have to post only journal entries in the software then after that ledger account and the trial balance will be prepared automatically by accounting software. Then make required adjustment journal entries at the end of the year. Then the Financial statement of the business will prepare automatically by accounting software.

Accounting cycle explained with the help of Animated Video:

We also explained the accounting cycle with the help of an animated video which is available for free of cost on this page as well as on our youtube channel. You can check it out from the below video or by going to our youtube channel.

Collect and Analyze the business transactions

First of all, an accountant collect information about the transaction, which means to collect spotting documents related to the transaction and then analyze these documents, to know which rule of accounting should be applicable to this transaction. Real, Personal, or Nominal a/c.

Record it in the Journal:

A Journal book is the first record of all transactions of the business.

Example:

Date 01/04/2017, Vishal started a business with cash Rs. 10,00,000/-

01/04/2017  Cash A/c    Dr   10,00,000

                          To Capital A/c                   10,00,000

Posting in the ledger :

A ledger account is a book of account in which we kept all the transactions of a particular account separately. With the help of ledger, we can get whole information about the particular account at a single place. but in the journal daybook, all the transactions are recorded date wise, if we want the total balance of a particular account then it is very difficult to get it in the journal daybook.

preparing trial balance (With adjustment entries):

All the net balances of the ledger accounts are transferred to the trial balance to check the errors(if any) in the posting of journal and ledger.

Recording Adjustment Entries:

Adjustment entries mean those entries which are related to an accrual basis, Depreciation or amortization. like outstanding/prepaid expenses, Accrued/received in advance Income, depreciation on all assets, and to write off goodwill or bad debts, etc.

Preparing Financial statement: Income statement and balance sheet

After all adjustments, we have to make a financial statement. it included trading and Profit/loss account or Income statement, balance sheet and cash flow statement, Statement of Changes in Equity.

Posting Closing entries:

Closing entries are that journal entries made at the end of an accounting period that transfer the balances of temporary accounts to permanent accounts.

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