What is accounting cycle | Example | Diagram

Accounting Cycle

Accounting cycle is the step by step process of recording, classifying and summarising business transaction 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 step of accounting cycle is automated. You have to post only journal entries only after that ledger account and the trial balance will be prepared automatically by accounting software. then make required adjustment entries. financial statement of the business also prepared automatically.

1. Collect and Analysis the business transactions

First of all, an accountant collect information about the transaction means collect spotting documents of the transaction and analysis it that which rule of accounting will apply to it. Real, Personal or Nominal a/c.

2. Record it in the Journal: 

Journal book is the first record of the all transaction 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

3. Posting in ledger :

Ledger 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, all the transactions are recording date wise but if we want the total balance of a particular account then it is very difficult to get it

4. preparing trial balance (With adjustment entries):

All the net balance of the ledger transferred to the tail balance to check out an error in posting (if any).

5. 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 write off goodwill or bad debts etc.

6. Preparing Financial statement: Income statement and balance sheet 

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

7. Posting Closing entries:

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

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